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COMMENTARY 



ON THE 



SCIENCE OF ORGANIZATION 



AND 



BUSINESS DEVELOPMENT 



ROBERT J. FRANK, LL.B. 

OF THE CHICAGO BAR 



THIRD EDITION 



Chicago Commercial Publishing Company 

Chicago 

1911 



.Ft 



COPYRIGHT 1907 

BY 

ROBERT J. FRANK 



COPYRIGHT 1909 

BY 

ROBERT J. FRANK 



COPYRIGHT 1910 

BY 

ROBERT J. FRANK 



COPYRIGHT 1911 

BY 

ROBERT J. FRANK 



Press of Chicago Legal News Co., Chicago. 



$2.74' 



(CIA303072 



A TREATISE 



ON THE 



LAW AND SCIENCE 



OF THE 



PROMOTION, ORGANIZATION, 

REORGANIZATION AND 

MANAGEMENT 



BUSINESS CORPORATIONS 



WITH SPECIAL REFERENCE TO APPROVED 
PLANS AND PROCEDURE FOR THE 
FINANCING OF MODERN BUSI- 
NESS ENTERPRISES 



"Science is nothing but trained and organized Common Sense, differing 
from the latter only as a Veteran may from a raw recruit, and its Methods 
differ from those of Common Sense, only as the guardsman's cut and thrust 
differ from the Manner in which a Savage Wields his Club." 

Huxley. 



PREFACE TO THIRD EDITION. 

The subject of the organization and control of busi- 
ness enterprises is now receiving universal attention, 
and while its importance has heretofore been appre- 
ciated by those who have been immediately connected 
with the development of modern business, it remained 
for the Supreme Court of the United States to empha- 
size, illustrate and impress upon the minds of all the 
people, by three recent epoch making decisions, the 
material as well as the economic importance of the 
subject. 

In the case commonly known and referred to as the 
"Corporation Tax Case" the public — and profession 
alike — were impressed with the reasoning of the court 
wherein it held that the privileges and advantages 
which inhere in a corporation (and not enjoyed by 
private firms and individuals) constitute property 
which may be taxed. In the "Standard Oil" and 
"Tobacco" cases the validity of the methods which 
have been heretofore pursued by the large business 
corporations have received their first important con- 
struction by this Court of last resort. 

The minor changes that have been made in this 
edition are accounted for by the fact that no extended 
discussion of the "holding company" or other ques- 
tionable plans of corporate manipulation or financing, — 



which have now been either expressly or by implica- 
tion condemned in the last two decisions above re- 
ferred to, — was attempted in the previous editions of 
this book, but it has been deemed advisable to make a 
few alterations and additions in the text so that the 
same may be more explicit, dependable and complete, 
in order to present a discussion of the settled law, 
practical plans and economically sound principles that 
should withstand the test of any reasonable present or 
future regulation of business affairs, by the state or 
national government. 

As it has been stated in previous editions, the object 
of this volume is to condense into one readable book 
an educational discussion of the fundamental practical 
questions which are presented in the legal organiza- 
tion, re-organization and financing, of business enter- 
prises that are not within the scope of a strictly legal 
treatise, for the benefit of incorporators, officers and 
directors of corporations, financiers and accountants 
as well as all other persons who are directly or in- 
directly interested in modern business. 

ROBERT J. FRANK. 

Chicago, November, 1911. 



CONTENTS 

INTEODUCTOEY. 
CHAPTEE I. 

ORGANIZATION. 

A Common Error. 

The Corporation and Its Advantages. 
How to Organize a Corporation. 
Where to Organize. 

CHAPTEE n. 

CORPORATE FINANCING. 

Capital, Bonds and Stocks. 
Capitalization of Corporations. 
Raising of Additional Capital. 
Transferring An Established Business to a Corporation. 

CHAPTEE III. 

CORPORATE MANAGEMENT. 

Directors, Officers — Their Duties and Liabilities. 

Stockholders' Rights and Liabilities. 

By-Laws and Their Uses. 

Corporate Records and Books of Account. 

Examination of Books and Records. 



8 CONTENTS. 

CHAPTER IV. 

REORGANIZATION AND CONSOLIDATION OF ENTERPRISES. 

Reorganization — Possible Advantages Therefrom. 

Consolidation of Enterprises. 

Stock-Jobbing. 

CHAPTER V. 

PROMOTION OF ENTERPRISES. 

Promoters. 

Promotion Contracts. 

Good Will — Trademarks and Trade Names. 

Patents and Their Commercial Value. 

Mining Enterprises. 

APPENDIX. 

Containing General and Special Forms of Contracts, Reorganiza- 
tion and Installment Certificates, By-Laws, Resolutions, etc.; also 
a synopsis of the Corporation Laws of favorite States for incorpo- 
rating, rules for Listing Stocks and Bonds, forms of Option Con- 
tracts, table showing the Earnings of Stocks and Bonds, and other 
special matter relating to the above subjects. 

(See TABLE OF CONTENTS, PAGE 187.) 






INTRODUCTORY 



Frank's "Science of Organization" etc. 



INTRODUCTORY 

Before the advent of the corporation, or before the 
almost universal adoption of that form of conducting 
business, those responsible for the success or failure 
of an enterprise were principally concerned about its 
details. Now such details are delegated to subordi- 
nates, and the actual head of the enterprise is more 
intimately concerned with its policy and its financial 
plans and general undertakings. 

It has been said that the type of man who has 
genius for acquiring exact technical knowledge is not 
ordinarily a successful executive, and the accuracy of 
this statement must, in a measure, be admitted; but 
it must also appear to those familiar with present con- 
ditions that the successful executive not only neces- 
sarily possesses an intimate general knowledge of the 
science pertaining to the particular enterprise under 
his control, but an equal general knowledge of the 
established rules concerning corporate organization 
and finance, and the elementary rights of stockholders, 
as well as the duties and responsibilities of corporate 
officers. 

It is clearly beyond the possibility or legitimate pur- 

(11) 



12 INTRODUCTORY. 

poses of any book to attempt to so qualify its readers 
as to enable them to dispense with the services of the 
legal profession; but it is possible to give such a 
general announcement of the law and approved 
procedure pertaining to corporate organization and 
financing — and particularly the practical features 
relating thereto — as will be of inestimable value to 
those charged with the responsibilities of such under- 
takings, and at the same time suggest to the practicing 
lawyer who has not specialized along those lines the 
important practical questions which inevitably arise 
for consideration in the course of such employment. 

Particularly is this true concerning the reorganiza- 
tion of a business enterprise where the adoption of 
corporate plans for its conduct is concerned. In- 
numerable questions there arise which ordinarily do 
not receive the attention they deserve on account of 
their far-reaching effect upon the success or failure 
of the enterprise, or upon the rights of the individuals 
interested therein. 

The contents of this volume may properly be termed 
a discussion of the middle ground between what has 
ordinarily heretofore been considered within the em- 
ployment and province of the lawyer — who is called 
upon to create the corporate entity which is to con- 
duct a new enterprise, or to take over the property 
of or reorganize an old one — and what might, with 
equal propriety, be considered within the province of 



INTRODUCTORY. 13 

the promoter or the individuals interested in such 
undertaking. 

Every mistake in the organization of a business 
corporation discloses ample evidence of either lack 
of proper knowledge of the questions constituting 
the middle-ground referred to, or (what is equally as 
disastrous to the enterprise) the failure to put such 
knowledge into execution; and this might, and often 
does arise on account of the fact that the employment 
of or instructions given the corporation attorney have 
been limited to simply complying with the statutory 
formalities in the creation of the corporate entity. 

Strictly speaking, the lawyer's duty is discharged 
by simply complying with the instructions of his client, 
be they ever so faulty; and the client is rarely ever 
qualified to decide for himself the most important 
preliminary questions that arise when the first steps 
are to be taken in launching a modern business 
venture, namely : the creation of the corporation which 
is to own and conduct it. Its purpose, capitalization 
and financial plans, adequate protection for investors 
or the owners of property to be conveyed, and rules 
for internal conduct, etc., are each and all matters of 
first importance, either immediately or at some future 
period of development ; and these and other questions 
of like significance are not met with inevery-day affairs 
of business life, and rarely in the general practice of 
the law. 



14 ISTTKODUCTOBY. 

A careful examination of all the works on corpora- 
tion law now in existence fails to disclose any adequate 
discussion of the field alluded to above; and this, per- 
haps, on account of the difficulty attending such a 
venture, owing to the great variety of conditions 
which are encountered in actual practice, and the 
almost hopeless task of attempting to cover such field 
in any satisfactory manner. But it is believed that a 
brief and concise announcement of the general prin- 
ciples covering the practical questions referred to, 
(which have been established by precedent as practical) 
and an equally general discussion of the law relating 
thereto, must necessarily be of value, particularly to 
the student or executive who is desirous of acquiring 
a knowledge along such lines, and who is not inclined 
or able to devote the time necessary to an extended 
research, much less to acquire the experience neces- 
sary to apply such knowledge once it is obtained. 

It may appear to those who simply review the con- 
tents of this volume, or who are unfamiliar with its 
purpose, that the arrangement of the subjects are 
somewhat unsystematic, and that it discusses only 
legal questions generally. It is to be hoped, however, 
that, upon a more careful study of the volume as a 
whole, the connection and continuity will be disclosed, 
and the fact appreciated that a general, rather than 
a particular discussion of the subjects in hand is more 
to be desired — as being of greater practical value, — 
than an extended discussion of details involving cir- 
cumstances or conditions which may never be met in 
actual business life. 



INTRODUCTORY. 15 

The illustrations given in the Appendix are intended 
to supplement and explain certain important state- 
ments or plans referred to in the text, and at the 
same time serve as suggestions for adaptation by the 
Profession. 

In every work of this character many questions, 
often considered elementary, are necessarily discussed, 
for the reason that every book treating on any science 
must anticipate that such a work will more often fall 
into the hands of those unfamiliar with such questions 
than otherwise. 

A study of the legal phase of business organization 
and development necessarily involves the considera- 
tion of, at least, four distinct subjects, viz: Corpora- 
tion Law, Corporation Finance, Corporation Account- 
ing and Business Economics generally. Then the prac- 
tical questions that are ever presenting themselves for 
solution in the application of theoretical principles to 
practical demands, makes work in this comparatively 
modern field one of the most exacting of occupations 
and one that should eventually occupy a place among 
the various recognized specialties of which the prac- 
tice of law is now composed. 



ORGANIZATION 



Frank's "Science op Organization" etc. 



CHAPTER I. 

ORGANIZATION. 

A Common Eebob. 

The Corporation and Its Advantages. 
How to Organize a Corporation. 
Where to Organize. 

a com- Every business has peculiarities and 
mon Error, mysteries that cannot be solved by intu- 
ition, and the controlling elements that make for suc- 
cess (when recognized at all) are often the result of 
the accidental occurrence of circumstances rather than 
the result of any pre-conceived plan. But there are 
elements which lead to certain failure, and they may, 
in most cases, be "seen from afar" and avoided by 
seasonable consideration. 

More money has often been made or lost through 
the plans adopted for financing, organizing or re- 
organizing a business than in its operation ; at the same 
time mistakes in such plans often prevent well-merited 
success or occasion individual sacrifice. 

There is often a tendency in the selection and pro- 
motion of a new enterprise to look primarily, and 
almost exclusively, to the " opportunities ' ' of the busi- 

(19) 



20 A COMMON ERROR. 






ness, and to disregard the equally important questions 
concerning the formation, or methods to be adopted 
for its successful conduct. 

Experience has demonstrated that a business oppor- 
tunity, otherwise promising, may be unsuccessful 
without a proper basis for operation, or executive 
ability behind it to organize the details and properly 
conduct such a business. 

To err in the inception of a business undertaking, 
in its organization, or in some apparently minor 
detail, may mean a handicap throughout; and the 
consequences of faulty formation, or errors of judg- 
ment are rarely discovered until experience has 
pointed them out, and frequently, after it is too late 
to remedy them. Then, it is but natural to refuse 
to see or admit such mistakes after they are once 
made, and to proceed upon a theory that has proven 
to be erroneous or without the promise of ultimate 
financial reward. 

Individually, serious losses of both money and 
property frequently occur through manipulations in 
the coalition or reorganization of business enterprises ; 
and opportunities for permanent and advantageous 
salaried connection with a consolidating organization 
are as often forfeited for lack of adequate protection 
for those entitled thereto. 

There are no undertakings in business affairs where 
so many opportunities for the exercise of skill and 



THE CORPORATION AND ITS ADVANTAGES. 21 

experience are presented, and where the same are so 
essential to success, as in the construction of a new, 
or the re-adjustment of the affairs of an established 
business — such as the devising of practical and advan- 
tageous plans for the securing of additional capital, 
or a regeneration of its vitality. 

The business with a proper foundation is at least 
one- third a success; the other two-thirds may usually 
be acquired by opportunity, and proper and adequate 
facilities. 



^ „ The Supreme Court of the United 

The Cor- ^ 

porationand States has said that " Private corpora- 
its Advan- tions are but associations of individuals 
tages * united for some common purpose, and 

permitted by the law to use a common name, and 
to change its members without dissolution of the 
association." And also, "A corporation is an arti- 
ficial person created by law as the representative 
of those persons, natural or artificial, who contribute 
to, or become holders of shares in the property 
entrusted to it for a common purpose. As it is the 
creature of positive law, its rights, powers and duties 
are prescribed by the law." 

The legitimate purposes of the corporation are to 
provide a modern system for the conduct of business, to 



22 THE CORPORATION AND ITS ADVANTAGES. 

enable two or more individuals to combine their capi- 
tal and efforts in the accomplishment of a common 
purpose, and also to obviate the risks and many other 
disadvantages of the obsolete co-partnership and pri- 
vate ownership of enterprises. 

The fact that great fortunes have been amassed and 
"trusts" created through this modern system simply 
demonstrates the weakness in the laws of the various 
States where such organizations have their existence 
and domicile, and should not militate against the plan 
itself. 

The legitimate advantages of incorporating a busi- 
ness are many and varied. It is impractical to attempt 
to enumerate all, or any considerable number of them. 
Among the most prominent, however, are the follow- 
ing:— 

It exclusively perpetuates any trade name, and inci- 
dentally the good will attached thereto. 

It eliminates the dangers of personal liability be- 
yond the money originally invested which attaches to 
any business conducted by an individual or co-part- 
nership. 

It enables the organizer to engage in different pur- 
suits, to more successfully conduct an enterprise, or 
enlarge the same, with a limited amount of individual 
capital. 

Upon the death of a stockholder, or disagreement, 



THE CORPORATION AND ITS ADVANTAGES. 23 

or separation of the management, the business is not 
necessarily hampered or interrupted, and the transfer 
of the individual interest of any stockholder is sim- 
plified, and its value readily determined. 

The capital invested can be increased at any time to 
admit of expanding the business, or to enable compet- 
ing enterprises to join forces, without disadvantage 
to either. 

Employes or customers may be permitted to become 
interested in the enterprise without the danger of dis- 
solution or other possible objectionable entanglements 
which almost invariably occur through disagreement 
of co-partners. 

Any stockholder may pledge his individual stock to 
obtain individual accommodation without jeopardiz- 
ing the interests of the corporation, which cannot be 
done by a partner in a co-partnership; besides, the 
individual debts or personal entanglements of any 
stockholder will not interfere with the existence or 
standing of the corporation. 

Then, the advantages of the individual stockholder 
of raising funds upon his individual interest in an 
enterprise (stock) over that of any other form of per- 
sonal property is apparent. 

In the majority of cases a business may be sold out- 
right to a much better advantage by first incorporat- 
ing it It is less difficult to find a number of persons 



24 HOW TO ORGANIZE A CORPORATION. 

who would take stock in a company that owned an 
attractive business than to find an individual who 
could purchase the whole; and besides, the value of 
the Good Will can be, in this way, preserved and real- 
ized upon, and the price of the business fixed by the 
owner before it is offered for sale. 

Probably the most important of all the advantages 
are the opportunities which are possible to the re- 
sourceful individual, and which present themselves in 
almost every undertaking, and they depend entirely 
upon the skill, ability and experience of the organizer 
of the particular corporation. 



How to -"■* * s frequently difficult to appreciate 
organize a or remember that a corporation is an 
corporation, artificial being, and exists independently 
of the stockholders or persons interested in it. By 
comprehending and bearing this fact in mind, all ques- 
tions relating to a corporate existence are simplified. 
These artificial beings, "invisible and intangible," 
are created only by legislative enactment. All of the 
States, however, now have what is termed "General 
Acts," which means that the Legislatures of the vari- 
ous States have prescribed methods of creating corpo- 
rate bodies, and have delegated to a certain State offi- 



HOW TO ORGANIZE A CORPORATION. 25 

rial, or officials, certain powers and duties which relieve 
the applicant for corporate license from the delays 
and other difficulties incident to direct application to 
the Legislature itself. 

Illinois, for instance, has such a "General Act," 
passed in 1872, and amended from time to time since 
its passage. In illustrating the mode of organizing a 
corporation, the law of Illinois will be here followed, 
and its provisions complied with. 

The first step in the organization of a business cor- 
poration is the determination by the parties to be 
interested therein upon some definite object to be 
accomplished; that involves the important question of 
business policy, which clients are usually expected to 
solve for themselves. 

For convenience, the advantages of incorporating 
have been treated under the preceding head; for it is 
important to understand such advantages in connec- 
tion with the purposes in view. In fact, the contents 
of this book are especially intended to be helpful in 
determining these and other important practical ques- 
tions, and the principal purpose thereof is to supply 
such information as is otherwise inaccessible, and it 
will be necessary to refer to the various headings for 
a full explanation and discussion on the questions here 
suggested. 



26 HOW TO OBGANIZE A COBPOEATIOET. 

After the objects which it is desired to obtain have 
been agreed upon and formulated, the next step is to 
apply to the Secretary of State for a "license to open 
books of subscription to the capital stock, " etc., and 
for the appointment of commissioners to complete the 
organization. This application sets forth the corpor- 
ate name selected; the objects for which the cor- 
poration is to be formed; the amount of capital stock; 
the amount of each share; the number of shares; the 
location of the corporation, and its duration of cor- 
porate life. 

In selecting the corporate name, reference should 
be had to the business contemplated, if this is feasible, 
and the name should be as short and euphonious as 
possible. The retention of an established trade name 
is always desirable, and can usually be accomplished 
without difficulty. 

Care should be exercised in avoiding the selection 
of the name of a corporation in existence, either in the 
State where the charter is obtained, or elsewhere, for 
under the recent law of "Unfair Competition," now 
recognized by all courts, it has been held that an in- 
junction would lie to restrain the use of a corporate 
name so similar to one already in existence that it 
would create confusion in trade, and otherwise be 
injurious to the business of the company having a 
prior corporate existence. 



HOW TO ORGANIZE A CORPORATION. 27 

The objects of the corporation are, perhaps, the 
most important rights to be protected in the formation 
of a corporation, for they frequently give the incor- 
porators many advantages in the development of the 
business. While it is always desirable to m&ke the 
objects contemplated as broad as possible, this may 
be overdone, and under the present Illinois statutes 
it is necessary to limit the objects of the corporation; 
besides, the doing of business ultra vires (outside the 
scope of the objects set forth in the application) is 
unlawful, and may result in loss to the company and 
lead to other complications. 

Determining the amount of capital stock is treated 
under a separate heading.* 

The amount of the shares must not be less than 
$10, nor more than $100 in the State of Illinois. As 
to the duration of the existence of the corporation, 
this may be made the safeguard or otherwise of the 
rights of the parties; that is, if it is desired to con- 
duct the enterprise for a limited time, that fact can be 
set forth in the application, and, in consequence, the 
corporation's life will end upon the termination of the 
time limit thus set forth. This means that the affairs 
of the corporation must be wound up at that time, 
regardless of the wishes of the stockholders, and with- 
out any further action being taken by them. 

•"Capitalization of Corporations," page 51. 



28 HOW TO ORGANIZE A CORPORATION. 

On the other hand, if it is not desired to have a lim- 
ited undertaking, the duration of the corporation 
should be ninety-nine years (the time limit in Illinois), 
for one of the chief assets of a business is its trade 
name, and this should be more valuable each succeed- 
ing year. 

Upon the receipt of the application, properly exe- 
cuted, the Secretary of State issues what is termed a 
"license to open books of subscription. ' * This instru- 
ment empowers the parties named therein to complete 
the organization — that is, to have the stock subscribed 
for according to law, and to give notices, under the 
statute, to parties subscribing for such stock, of the 
holding of a meeting to elect directors, etc. The stat- 
utes provide that the notice for the holding of the 
first meeting must be mailed to all subscribers to the 
capital stock at least ten days prior to the meeting 
day, as determined by the commissioners and sub- 
scribers, and set forth in the notice referred to. 

There is now a custom among many incorporators 
of formally waiving the statutory notice above re- 
ferred to, and of holding the first meeting, to organize, 
immediately upon receipt of the license from the 
Secretary of State. The question of the legality of so 
doing was submitted to the Supreme Court of Illinois 
in 1906 and the court held that "the only persons 
interested in the result to be obtained by giving notice 






HOW TO ORGANIZE A CORPORATION. 29 

of the object, time and place of a meeting of the sub- 
scribers to the Capital Stock of a corporation for the 
purposes specified in the statutes are the subscribers 
themselves,' ' and that, therefore, if all the subscribers 
join in such waiver of notice, and the meeting to 
organize is actually held in accordance with such 
waiver, the purpose of the statute has thereby been 
accomplished. 

In pursuing this method of completing the organiza- 
tion of a corporation, the waiver of notice should be 
entered in the Minute Book of the corporation, and 
bear the original signatures of all the subscribers. 

Under the present state of our "General Act" it 
makes it necessary for the commissioners named in 
the license referred to, to take over, as such commis- 
sioners and trustees, for the new corporation when 
formed, any property which it is contemplated shall 
be transferred to the new corporation, and this, of 
course, includes the payment of money, which, under 
the present act, is required to be done on or before the 
meeting called by the notice above described, to the 
extent of 50 percent of the capital stock ; that is, one- 
half of the capital stock must now be paid to the com- 
missioners in advance of complete organization of 
every business corporation. 

Great care must be exercised in the accepting of 
property in payment for capital stock by the commis- 



30 HOW TO OBGANIZE A COBPORATION". 

sioners in question, or they assume a liability which 
they may not contemplate, or intend to assume. 

In the Appendix will be found a copy of a resolu- 
tion which it is considered covers this question in a 
practical way,* and the subject of taking over assets 
other than cash in payment of stock in a new corpora- 
tion is treated at length hereinafter.! 

Appraisals of property to be taken in payment for 
stock are always advisable, if not necessary, both by 
the commissioners and directors when elected, and as 
to the valuation of such property, that is also treated 
hereinafter.! 

Separate minutes of the acceptance and appraisal 
of property by the commissioners should be entered 
in the Minute Book for their own protection, and as 
a basis for a resolution, by the directors, taking over 
the property from such commissioners, after the cor- 
poration is formed. 

Upon the meeting day of the subscribers to the 
capital stock, set forth in the notice referred to, the 
usual formalities should be observed in all particulars, 
in the holding of the first meeting and transaction 
of business thereat, and the minutes should be pre- 
served and recorded in the Minute Book of the cor- 
poration, and signed by the parties in interest, if they 

♦Appendix, page 200. 

t "Transferring of An Established Business to a Corporation," page 69. 



HOW TO ORGANIZE A CORPORATION. 31 

are not too numerous; at any rate, they should be 
signed by the commissioners, and attested by the secre- 
tary. 

At this meeting, the subscribers to the capital 
stock elect the first Board of Directors, and this is 
important in relation to the future management and 
control of the corporation, for the ensuing year, at 
least ; for it must be borne in mind that the directors 
control the offices of the corporation, and not the stock- 
holders, and that the officers in turn transact the busi- 
ness of the corporation. 

The Statutes of Illinois relating to directors pro- 
vide that the number of directors shall be fixed at 
the first meeting of the subscribers, and their number 
depends wholly upon the will of the incorporators. 
Such subscribers may, if they see fit, by resolution, 
divide the Board of Directors into three classes; the 
term of office of the first class expiring on the date of 
the annual election of the company then next ensuing ; 
the second class one year thereafter, and the third 
class two years thereafter. Thus, at each annual elec- 
tion for directors after such classification, the stock- 
holders elect, for the term of three years, the number 
of directors constituting such class whose term then 
expires. In this way, one or more directors will hold 
office from the beginning of the organization for three 
years, others for two years, and still others for one 



32 HOW TO ORGANIZE A CORPORATION. 

year, if for any reason this plan be advisable, as it 
frequently is in large corporations. The usual plan, 
however, is to elect the entire Board of Directors for 
a period of one year, particularly in small or close cor- 
porations. 

We now have (at least) three commissioners hold- 
ing the title to the property or funds of the corpora- 
tion in process of formation, which have been turned 
over to them in accordance with the law, and all neces- 
sary steps have thus far been taken, including the 
election of the first Board of Directors, and the record- 
ing of the minutes thereof in the Minute Book. 

A report in due form of these proceedings is now 
prepared and forwarded to the Secretary of State, 
and upon its receipt (if in all things it complies with 
the law and the original application) a certificate of 
complete organization is issued and forwarded to the 
commissioners, who should at once record the same in 
the office of the Eecorder of Deeds of the county where 
the principal office of the corporation is located; for 
this is a condition precedent to the corporate life of 
the company, or its right to transact any other busi- 
ness than that already explained. 

The next step is the adoption of a code of by-laws 
for the government of the company, and it is well to 
remember that the by-laws are the internal laws of 
the corporation, and as such should set forth the rules 



HOW TO OEGANIZE A COEPORATION. 33 

lecessary for the proper conduct of the business. This 
ms been made the subject of separate discussion,* 
md, therefore, need not be further alluded to at this 
time. 

While it is impossible to prepare " stock by-laws " 
that will meet all the requirements of incorporators 
generally, still the form given in the Appendix heretof 
will be found to be adaptable, with minor changes, to 
the ordinary business corporation organized under the 
laws of Illinois. 

After the adoption of a set of by-laws for the gov- 
ernment of the corporation, the next step to be taken 
is the election of officers, and they will be such as the 
by-laws have provided for. The laws of Illinois 
require every business corporation to have a Presi- 
dent, a Secretary and a Treasurer; and leaves it dis- 
cretionary with the directors as to how many addi- 
tional offices they shall create. 

After the election of officers, if assets have been 
turned over to the commissioners, to be applied upon 
the payment of stock subscriptions, the Board of 
Directors then proceed to appraise and take over the 
same (if it be property), and to approve or disapprove 
of the action of the commissioners in this regard. 
There is no direction in the law for the carrying out 
of its provisions under which advance payments are 

• By-Laws and Their Uses," page 94. f Appendix, page 217. 



34 HOW TO ORGANIZE A CORPORATION. 

required, except that they shall be paid. It is mani- 
fest, however, that inasmuch as the corporation 
contemplated is not yet in existence, the commissioners 
are the only proper persons to take title to property, 
or to receive advance payments on account of stock 
subscriptions ; and for that purpose, they stand in the 
relation of trustees for the new corporation when 
formed. 

The approved method of taking over property or 
advance payments made by the stockholders to the com- 
missioners, in advance of complete organization, is 
for the Board of Directors, by proper resolution, to 
ratify, confirm and adopt the acts of the commission- 
ers in this behalf, if such acts are in fact proper and 
deemed for the best interest of the corporation. A 
form of resolution applicable for this purpose may 
be found in the Appendix,* and will serve as a guide 
to what is usual under the circumstances here indi- 
cated. 

The rules relating to the valuation, appraisal and 
purchase of assets by a new corporation are further, 
and at length, discussed under the title, "Transfer- 
ring of An Established Business to a Corporation. ' 'f 

After the foregoing steps have been taken, and the 
minutes of the various meetings written up in the 
Corporate Eecord Book, the ordinary business cor- 

• Appendix, page 209. t^age 69. 



HOW TO ORGANIZE A CORPORATION. 35 

poration is in existence, fully organized and ready for 
the transaction of any business for which it was 
incorporated. 

The question of "how to create the corporate entity 
before the principal capital becomes interested' ' fre- 
quently arises. Particularly is this so where the incor- 
porators have a limited amount of capital, or the cor- 
poration is being created for the purpose of taking 
over a business already established, or for reorganiza- 
tion purposes, and the details of such undertaking 
have not been entirely settled. In such a case it is 
possible to accomplish the object, and fully comply 
with the law requiring 50 percent of the capital stock 
to be paid in before complete organization, etc., by 
first incorporating with a nominal capitalization, and 
afterward increasing the capital stock to the amount 
originally contemplated or desired. 

The Corporation Laws of the various States differ 
somewhat materially in the manner and form of creat- 
ing a corporation, and it is beyond the scope of this 
book to undertake to discuss the details of the various 
acts; the formalities required for their compliance 
must necessarily be entrusted to those familiar with 
such laws as they exist at the time of organization; 
but the essential practical features of the organization 
of business corporations are much the same every- 
where, and they are discussed under the various head- 
ings herein. 



36 WHERE TO ORGANIZE. 

where to Like most questions of procedure, this 

organize. is one depending largely upon the cir- 
cumstances of each individual case. There are no 
general rules which can be applied when the ultimate 
success of the enterprise is considered. 

So far as the most favorable laws are concerned, 
that is always subordinate to the more important 
questions of business policy. For instance, one State 
may offer inducements in the way of reduced ineor- 
portion fees and enlarged privileges — in short, a 
more favorable franchise; but when this is compared 
with the other objects sought to be accomplished, it 
is of little importance to the organizer. 

Many a corporation has been handicapped by mak- 
ing the fatal mistake in organizing under the laws of 
some foreign State. Usually companies with ulterior 
objects seek domicile in a State offering the greatest 
latitude for their purposes — this fact being so noto- 
rious that it is prima facie a, reflection upon legitimate 
undertakings to go away from "home" for the pur- 
pose of organization. However, this reflection may 
be removed by explanation, when the peculiar circum- 
stances of the particular case justify the selection of 
a foreign State for incorporation, as they frequently 
do. 

New Jersey, Maine and Delaware have gone a long 
way toward encouraging corporations to organize in 



WHERE TO ORGANIZE. 37 

their respective States; North and South Dakota and 
Arizona have attempted to do likewise, and the laws 
of all these States have their peculiar advantages, 
particularly over those of some of the other States 
where corporations would naturally desire to locate 
on account of the business advantages offered. 

It will be found that in the States where business 
is most centralized, and where the actual business of 
most business corporations is transacted, the laws are 
more or less stringent, and some are unreasonable 
and obsolete; but, in some of these last-mentioned 
States the intention at least is to protect stockholders 
and creditors, and for the legitimate, well-meaning 
enterprise it is often best to submit to these condi- 
tions and organize at home. 

Particularly is this true where outside capital is to 
be interested. Prospective investors, as a rule, invest 
their money under the advice of legal counsel, and 
local attorneys are naturally more familiar with the 
laws and decisions of the courts thereabout, in their 
own State, and can advise their clients more readily 
and securely; and in addition to this fact, the invest- 
ing clients themselves feel more secure in their rights 
when the corporation is organized under the local 
State laws. 

The State of West Virginia was the first to offer 
inducements to foreign corporations in the way of 



38 WHEKE TO ORGANIZE. 

reduced incorporation fees and enlarged powers and 
limited liability. A large number of the modern com- 
bination organizations were attracted to that State 
on that account, but after organizing there, the Legis- 
lature changed the laws, and it was otherwise deemed 
necessary to leave the State and incorporate else- 
where, particularly in New Jersey. 

It must be borne in mind that in nearly all of the 
States the right to change the General Incorporation 
Act is reserved by the Legislature, and the advan- 
tages offered may be diminished or repealed at any 
time, and the privileges of the corporation curtailed. 

In addition to this possible objection, most States 
have recognized the fact that their local capital have 
sought other States for the purpose of organization 
only to evade the payment of the local incorporation 
fees, and to otherwise evade the provisions of the laws 
of 'the respective States where such corporations in 
fact intend to operate. To protect themselves, special 
acts have been passed by most of the States, similar 
to that now in force in Illinois, which defeats nearly 
all of the advantages heretofore obtained by organiz- 
ing in any of the foreign jurisdictions. 

The present act of Illinois relating to "Foreign 
Corporations" is given verbatim in the Appendix;* 
and most of the States have the same or a very simi- 

* Appendix, page 258. 



(WHERE TO ORGANIZE. 39 

lar statute for the regulation of foreign corporations. 

For the convenience of prospective incorporators, a 
synopsis of the Corporation Laws of the States of 
New Jersey, Delaware, Maine and South Dakota will 
also be found in the Appendix,! which shows the spe- 
cial powers, statutory fees and other information 
desirable for a preliminary understanding and con- 
sideration of the questions to be taken into account 
when selecting a State in which to organize. 

The various statutes of those States deemed most 
favorable, and above referred to, have numerous 
minor provisions, presumably for the protection of 
stockholders and the public generally, which often 
serve to furnish dissatisfied stockholders with the 
means of annoying and otherwise interfering with the 
business of a corporation organized in a foreign juris- 
diction. 

It will be seen, by reference to these statutes, that 
the objects to be obtained, and suggested here, must 
be taken into consideration, first in this as well as in 
other questions relating to the organization of a busi- 
ness corporation ; and the important question to decide 
is always, What effect will the organization of the par- 
ticular corporation under the laws of a foreign State 
have upon its business success ? 

t Appendix, page 247. 



40 WHERE TO ORGANIZE. 

Whenever the laws, conditions, purposes or plans 
justify the decision to incorporate in a state other than 
that in which the parties in interest reside, or where 
the principal operations are to be conducted, it is of 
first importance that a proper statutory agent or local 
representative be chosen to represent the new corpora- 
tion, both to bring it into existence, and thereafter in 
qualifying under the laws of the state relating to 
domicile, such as maintaining a statutory office, acting 
as local resident agent, director or officer — as the laws 
may require — for the acceptance of service of legal 
process, the keeping of certain corporate books or rec- 
ords, etc., all of which require reliable, competent and 
permanent attention in order that such new corpora- 
tion may not suffer loss through unknown, or unneces- 
sary litigation, statutory fines, etc. 

Similar important services are necessary when any 
corporation attempts to comply with the various 
"Foreign Corporation Acts' ' by establishing local 
branches in states foreign to that of their creation; 
and here as before the questions of reliability, experi- 
ence, facilities to serve, and permanency (rather than 
economy) should control in the selection of a repre- 
sentative for the conduct of such foreign affairs. 



CORPORATE FINANCING 



Frank's "Science of Organization" etc. 



CHAPTER II. 

CORPORATE FINANCING. 

Capital, Bonds and Stocks. 

Capitalization of Corporations. 

Raising of Additional Capital. 

Transferring of An Established Business to a Corporation. 

capital, ^ e questions of finance are among 
Bonds and the most difficult — if not the most im- 
stocks. portant — with which the organizer of a 

business corporation has to deal, and like other ques- 
tions of business policy, they are necessarily governed 
by the circumstances of the undertaking in hand. 

It is necessary for a correct understanding of the 
questions of corporation finance that the distinction 
between the terms capital stock, shares of stock and 
capital be understood. At the same time, an under- 
standing of the nature and peculiar characteristics of 
stock as property is essential. 

The difference between the capital stock and capital 
of a corporation is, that the former constitutes the 
amount divided into shares or parts at which the in- 
corporators have limited the issuance of stock — in 
other words, the amount upon which calls may be made 

(43) 



44 CAPITAL, BONDS AND STOCKS. 

upon the stockholders and dividends paid; while the 
capital of a corporation is the proceeds of the sale of 
this capital stock, and, in addition thereto, all money 
or property of the corporation acquired from any and 
all lawful sources. The former amount remains the 
same until changed by consent of the State, while the 
latter may vary according to the success of the enter- 
prise. 

The term shares of stock means the several parts 
into which the capital stock is divided, e. g., if the cap- 
ital stock of a corporation is $100,000, and the denom- 
ination of the shares is fixed at $100 each, a share of 
stock represents one one-thousandth interest in the 
corporation. Then these shares of stock are repre- 
sented by stock certificates, which may be made out 
to represent one, or any number of shares of the cap- 
ital stock, according to the will of the makers of the 
certificates. 

The proceeds of the sale of the capital stock — the 
capital — belongs to the corporation, and the owners 
of such capital stock have no right to withdraw any 
part of such proceeds after it is once paid into the 
treasury; and this is the law, even if all the capital 
stock is owned and held by one individual. As here- 
tofore stated, the corporation is a legal entity — a per- 
son in the eyes of the law — and the stockholders, 
directors and officers combined do not constitute the 



CAPITAL, BONDS AND STOCKS. 45 

corporation. A stockholder, by reason of his owning 
stock in a corporation, does not thereby acquire title 
or right to the profits or surplus of a corporation, 
until the same has been formally and legally "de- 
clared' ' by the Board of Directors and formally set 
apart for the stockholders ; at the same time, a stock- 
holder has no title or individual interest in, or rights 
to, the property of a corporation until a dissolution 
takes place. He cannot even acquire a good title to 
the property of a corporation by purchasing all of its 
stock and then abandoning the corporate existence. 

There are but two general classes of stock in a 
business corporation which need be here referred to, 
namely, common and preferred. Many American 
writers on Corporation Law give other classifications, 
such as "watered stock" "deferred stock/ 9 "special 
stock" and "over-issued stock," but they all fall 
within the above classification, or are of no importance 
in this connection, except to understand the meaning 
of the terms employed. 

"Watered stock" means simply stock that has been 
issued and not paid for, in money or money's worth, 
to the extent of the face value of the stock issued; 
"deferred stock" is in reality a bond under another 
name; "over-issued stock" — as its name implies — is 
stock that is issued in excess of that authorized by 
law, or for which the corporation was originally cap- 



46 CAPITAL,, BONDS AND STOCKS. 

italized; and the term "special stock" is a class of 
corporate property unknown in any other State but 
Massachusetts, where it is created and authorized by 
the laws of the State. 

Common stock is a general interest in common in 
the property of a corporation. It is, like all other 
stock, divided into parts or shares which represent a 
certain proportionate part of the whole. This class of 
stock confers equal rights and privileges among all 
its owners, such as the right to share in the profits of 
the business; to vote for directors; and upon a disso- 
lution of the corporation, to share equally with all 
other stockholders, in the division of the assets, etc. 

Preferred stock is a special interest and contract 
combined whereby the corporation agrees to pay its 
owners a certain specified dividend out of the net 
profits of the business in advance and in preference 
to the common stockholders. 

It may not be amiss to here refer to some of the 
important differences between preferred and common 
stock. The former provides for a guaranteed divi- 
dend out of the net profits, usually the customary rate 
of interest of the State where the corporation is or- 
ganized. Such dividends can be made cumulative or 
non-cumulative; that is, should the net profits for 
any one year be insufficient to pay the dividend pro- 
vided for cumulative preferred stock, any unpaid por- 



CAPITAL, BONDS AND STOCKS. 47 

tion of such dividend must be made up and paid out of 
the profits of any subsequent year, before dividends 
can be applied to the common stock, or any other class. 

Common stock has no guaranty of dividends, even 
if there should be net profits, but is entitled to all of 
the earnings of the company after the dividend is paid 
on the preferred stock; and unless the conditions of 
the preferred stock are such as to prevent, it will pro- 
rate with the common stock in all dividends that may 
be earned and declared, after the dividend has been 
paid on the preferred stock, and an equal amount paid 
to the holders of the common stock. 

The conditions upon which preferred stock is issued 
govern all the rights of its holders, and constitute a 
contract between the corporation and the holder; and 
in the absence of a condition to the contrary, preferred 
stockholders may vote and exercise all the rights of 
the holders of the common stock. 

Some of the State statutes do not provide for the 
issuing of preferred stock, but it has been repeatedly 
held that such stock may, nevertheless, be issued if it 
is provided for at the time of organization; and such 
preferred stock may also be issued at any time there- 
after, with the consent of the holders of all the com- 
mon stock of the corporation. 

A Stock Certificate is not necessary to the owner- 
ship of stock in a corporation. It is merely evidence 



48 CAPITAL, BONDS AND STOCKS. 

of the ownership; the stock exists independently of 
the certificate itself. 

Shares of stock are a peculiar species of property. 
They are intangible, and resemble what is termed in 
law a chose in action — that is, a right or claim which 
can be reduced to writing and enforced in a court of 
law. 

Shares of stock are, in the absence of a statute ex- 
pressly authorizing the same, not subject to levy and 
sale upon execution, like other personal property; 
however, most of the States have enacted laws whereby 
such levy may be made. It is necessary to follow such 
statutes strictly in order to divest the record holder 
of stock of his title by attachment; and it has been 
decided that attempting to reach the interest of a 
stockholder by garnisheeing the corporation is in- 
effectual, which demonstrates the principle above 
stated that this species of property is somewhat pe- 
culiar, and differs from a claim for money or prop- 
erty, in that particular at least. 

Then, in addition, shares of stock possess many 
features of negotiability. For instance, by simply 
indorsing the certificate in blank, stock may be trans- 
ferred from one individual to another by delivery of 
the certificate, and the right to insert the name of any 
intermediate or ultimate owner, and to have the stock 
transferred to such owner, upon the books of the com- 



CAPITAL,, BONDS AND STOCKS. 49 

Dany, passes with the certificate indorsed in that way — 
rtiich enables the possessor of this species of property 

readily use the same as security for financial accom- 
odation. 

Bonds are formal obligations executed by a corpora- 
tion and usually secured by trust deed upon the plant 
or assets of the company. They are ordinarily issued 
in denominations of a size that will enable the corpora- 
tion to negotiate a large loan among a number of 
investors, and to secure alike any number of holders of 
such obligations. 

The terms of payment and security of bonds are 
wholly dependent upon the will of the corporation 
creating them. The usual object of issuing this form 
of obligation is to obtain what is termed a "permanent 
loan," or financial accommodation for a long time, and 
upon a low rate of interest, in order that the same may 
be used for the advancement of the business, and to 
be repaid out of the profits of the enterprise. 

It is customary to make such obligations payable 
to the bearer ; and when this is done, they are suscept- 
ible of being transmitted from one person to another 
without formality of any kind. The law presumes 
ownership with their possession, when made in that 
way. 

The conditions of a trust deed made to secure such 
bonds, as well as the terms of the bonds themselves, 



50 CAPITAL, BONDS AND STOCKS. 

may be made to facilitate or hinder their sale ; conse- 
quently great care is necessary in the preparation of 
both. 

Bonds may be drawn so as to be convertible into 
stock, at the option of the holder, and in this way 
facilitate their sale, by enabling the owner to practi- 
cally invest in the enterprise, and in case of success, to 
convert his bond holdings into stock. And on the 
other hand, if the venture proves less profitable as an 
investment than the interest guaranteed by the bonds, 
the holder is secured, and can ultimately recover his 
investment, with interest. 

Bonds may also be issued in payment of dividends ; 
by so doing, the amount of the dividend may be re- 
tained in the business for development purposes, and 
the* stockholders will have received what is equivalent 
to the dividend as well. 

The foregoing simply explains the latitude and 
some of the advantages afforded the creator of bonds 
and stocks. The terms that may be incorporated in 
stock certificates and industrial bonds are always a 
subject of contract between the corporation and the 
purchaser; such terms are limited only by general 
rules of law and business expediency. 

The term debenture is often used interchangeably 
with, or substituted for, the word bond. While the 
meaning of the term debenture is, strictly speaking, 



CAPITALIZATION OF CORPORATIONS. 51 



debt, and unsecured ; but common usage has established 
many qualifications to the word bond, and they are ap- 
proved in the world of finance, and their meaning and 
significance understood. 



capitaiiza- -^ * s comparatively a simple matter to 
tion of cor- determine the questions relating to capi- 
porations. talization where the number of parties 
in interest are few, or in a case where the business to 
be capitalized is what is termed a " close corpora- 
tion.' ' In such cases the objects to be accomplished 
are usually confined to the conduct of a single business 
venture for the benefit of a limited number of per- 
sons, and the questions that arise under other, and 
ordinary circumstances, are absent. It is, therefore, 
unnecessary to discuss the capitalization of such a 
corporation as is here alluded to, for it is presumed 
that no outside assistance or interest will be desired. 
It is where the rights of the parties are to be con- 
sidered at the time of organization — in order that 
they may be protected under present conditions and 
future business developments, and that the needs of 
a business may be provided for at the time of organi- 
zation, as well as in the future — that this subject re- 
quires special attention. 



52 CAPITALIZATION OF COEPOEATIONS. 

A business with a good foundation and prospects 
may be greatly handicapped, and its opportunities for 
successful promotion be "killed," by over-capitaliza- 
tion. For example, A had a valuable patented 
device that was, in itself, the foundation for a success- 
ful business venture. He formed a corporation and 
capitalized it at $2,000,000, when as a matter of fact, 
$100,000 was all the working capital which was neces- 
sary for the successful conduct of the business. 

By manipulations, hereinafter more fully explained, 
the business was so arranged as to offer this stock 
at a ridiculous figure (below par, of course), with the 
result that after disposing of a certain amount of this 
stock — enough to get the business thoroughly en- 
tangled, and to demonstrate that such a plan was not 
feasible, and that sufficient money could not be raised 
thereby to exploit the device and promote the busi- 
ness — it became necessary to reorganize the company, 
and to re-capitalize it at a reasonable amount, before 
the business could be financed sufficiently to dem- 
onstrate the earning capacity of the device. 

Numerous other cases illustrating the principle 
above set forth could be given, but they are of 
such frequent occurrence as to be familiar to everyone 
who has had experience in business organization. 

At the same time, the capitalization of a business 
corporation at an amount less than the immediate or 



CAPITALIZATION OF CORPORATIONS. 53 

future prospective requirements of the business will 
admit, may, and usually does, furnish an occasion 
for reorganization. "What may be considered suffi- 
cient capital for present needs may prove wholly in- 
adequate after the business has been developed, and 
unless this contingency has been taken into account 
at the time of organization the providing of addi- 
tional capital is always a difficult question; for the 
rights of the stockholders will have accrued in the 
meantime, and their consent to such an object may 
be necessary and difficult to obtain. 

Under the laws of Illinois (and most other States) 
it is necessary to obtain the consent of stockholders 
owning two-thirds of the capital stock before an in- 
crease of the same can be legally . accomplished ; and 
unless the amount of capitalization at the time of 
organization is sufficient to provide for the future needs 
of a business the absence of this consent may defeat 
the raising of such needed capital, in that way. 

There is, of course, no arbitrary or settled rule for 
fixing the amount of capitalization of a business cor- 
poration, but the effectual and conservative rule 
usually adopted for the guidance of incorporators is 
that the demonstrated or reasonably prospective earn- 
ing capacity of a business should control in fixing the 
amount. If the question arises in the reorganization 
of a going business, its past record and reasonable 



54 CAPITALIZATION OF CORPORATIONS. 

future prospects based thereon, are legitimate sub- 
jects for consideration and guidance in fixing the 
capitalization. As an illustration: Where a business 
has shown a net profit of 15% on the capital employed, 
it would not be out of proportion to capitalize a cor- 
poration, which was to operate such a business in the 
future, at three times the amount formerly invested 
therein. On the other hand, if the proposition under 
consideration is a wholly new business venture, its 
present and conservatively estimated future prospects 
should form the basis of capitalization; and these 
prospects may be arrived at by various methods 
usually known to those experienced in the particular 
line of business under consideration. 

There are usually but two important considerations 
in fixing the capitalization of a corporation, and they 
are, first, to enable the company to obtain working 
capital; and second, to protect the rights of the pres- 
ent parties in interest. In accomplishing the former, 
due regard should be entertained for the opinions 
and judgment of those who may be invited to invest 
in the undertaking. 

The manner of capitalizing a corporation, that is 
in fixing the classification of stock to be issued— 
whether preferred or common, or both — is also im- 
portant, and this should be done at the time of 
organization, as far as possible, for reasons already 
alluded to. 



CAPITALIZATION OF CORPORATIONS. 55 

In the reorganization of a corporation or business 
it is frequently desirable that the former owners of 
le business should continue to be interested in the 
iterprise, by accepting stocks or bonds, or both, in 
payment for their interest conveyed to the corpora- 
ion. This may be accomplished by issuing preferred 
stock to cover all the interest of such persons, or to 
5 sue bonds to cover the conservative value of the 
mgible property, and common stock in payment of 
the Good Will and other intangible assets conveyed. 
If, on the other hand, it is the desire of those interested 
to ultimately dispose of their holdings entirely (in 
other words, to incorporate for the purpose of dis- 
posing of their business), this may be accomplished 
through the bond issue, or by the issuing of preferred 
stock which is preferred as to the assets as well as to 
profits; for they are both more likely to find a ready 
sale than common stock, particularly while the enter- 
prise is in its infancy. 

The question of whether the interest conveyed shall 
be paid in preferred stock or bonds is simply one of 
expediency; in either event, the party interested is 
protected. The principal and controlling difference 
between preferred stock (such as is here suggested) 
and bonds secured by a trust deed on the plant of an 
established business, is that the bonds secure the 
holder ahead of subsequent creditors and guarantee 



56 CAPITALIZATION OF COKPORATIONS. 

the payment of a certain rate of interest, while the 
preferred stock does not insure a dividend unless it 
is earned, and is not a lien on the assets; and with 
these differences, they may be considered as of equal 
value and security. If the business management and 
conditions justify the accepting of preferred stock of 
this character, it is frequently desirable to do so in 
preference to issuing bonds ; for with such preferred 
stock there is no indebtedness against the business to 
injure its credit and prospects, which would be the 
case if a bond issue was adopted. 

The capitalization of a new venture without a 
nucleus or established business as a basis, and where 
the organizers depend upon the sale of stock for work- 
ing capital, presents more difficulties. 

Ordinarily, there are a number of persons interested 
in such undertaking at the time of organization who 
propose to contribute a certain amount toward its 
promotion and establishment but expect to raise the 
majority of the capital by the sale of stock. 

Where such a condition exists, it is advisable to 
have both preferred and common stock, the proportion 
of which must depend upon the circumstances of the 
particular case in hand. An approved and dem- 
onstrated plan, however, is to have the stock divided 
equally; that is, one-half preferred and one-half com- 
mon, and to capitalize the corporation at an amount 



CAPITALIZATION OF CORPORATIONS. 57 

sufficient to make the proceeds from the sale of the 
^referred stock furnish the immediate working capi- 
tal, and to leave the common stock for sale for future 
levelopment purposes, after its earning capacity has 
)een demonstrated; or if it is feasible to do so, have 
le preferred stock cumulative as to dividends, and 
referred as to assets, and to sell as near as possible 
equal proportion of each class of stock at the out- 
set. In this way, the investor is insured a dividend 
m one-half his investment, if the business earns 
snough to pay it ; and in the event of a dissolution or 
failure, he would be protected ahead of common stock- 
lolders in the same proportion. Then enough of this 
preferred stock would be retained to aid the sale of 
the common stock, should the business require it. 

There are numbers of circumstances which permit 
of the issuing of all common stock, particularly among 
the smaller undertakings, and of course this is to be 
recommended whenever the conditions will justify 
such a course — that is, when the capital necessary for 
the needs of the business can be as readily obtained 
in that way. 

After the amount and manner of capitalization of a 
business corporation has been determined there still 
remain for consideration the terms and manner of 
payment of the stock sold or subscribed for. 

The statutes of most of the States provide for a 



58 CAPITALIZATION OF CORPORATIONS. 

certain mininmm amount with which a corporation 
may begin business, and this, of course, must be paid 
in at the time of organization. In the absence of a 
statute to the contrary, the payment for all stock in a 
corporation is a fit subject of contract (as between the 
subscriber and corporation), and in the absence of 
any contract such payment is subject to call of the 
Board of Directors. 

In a case where it is necessary to sell stock to be 
paid for in installments, or to sell stock in small blocks 
or installments, the approved method for accomplish- 
ing this purpose is to issue an "installment certifi- 
cate' 9 or contract for the ultimate delivery of the reg- 
ular stock certificate upon complete payment, or when 
a certain number of shares shall have been paid for, 
etc. Where it is necessary to adopt such methods for 
the raising of capital, it is usually advisable to issue 
such contracts in lieu of stock, and to have their terms 
provide for the delivery of the regular stock certifi- 
cates upon a certain specified date, far enough in the 
future to insure the sale of all stock which it is con- 
templated will be sold, or which it is deemed necessary 
to sell, in that way. For, if the regular stock certifi- 
cates are delivered as the stock is sold, circumstances 
may make it necessary or profitable for the purchasers 
to dispose of some or all of their stock before the com- 
pany's unissued stock is sold, and in this way create 



CAPITALIZATION OF CORPORATIONS. 59 

a competition between such stockholders and the cor- 
poration, and, in consequence, demoralize the market 
and hinder the sale of the balance of the company's 
stock. 

Such a certificate as is here alluded to must be 
drawn with special reference to each particular state 
of facts. An approved general form illustrating the 
application of the plan here referred to will be found 
in the Appendix.* 

Kecurring to the subject of bonds : Their terms and 
conditions, and the terms and conditions of the trust 
deed made for their security, are matters of impor- 
tance from a practical standpoint, both to the corpora- 
tion issuing them and to the prospective purchaser in 
the open market. 

While it is necessary that these provisions should 
be all that is reasonably required for the protection of 
the investor, care should be exercised in making their 
terms to suit the convenience and possible contingen- 
cies of the business of the corporation; as an exam- 
ple, in the terms of their payment it may be provided 
that any of a certain series of bonds may be retired 
by the corporation upon giving reasonable notice to 
that effect upon any annual interest day, and by pay- 
ing a certain reasonable amount for the privilege, in 
the shape of advance interest. In addition, the de- 

* Appendix, page 214. 



60 RAISING OF ADDITIONAL CAPITAL.. 

nomination and time of payment should be considered. 
If it is desired to sell such bonds in a private way, 
or in a locality wherein the persons interested are 
known, the making of small denominations may 
greatly facilitate their sale among small investors; 
and the time of payment should be placed at a conserv- 
ative distance in the future to insure the ability of the 
company to repay the principal when due. 

It is often advisable and necessary that the stocks 
and bonds of a corporation should be listed with the 
local Stock Exchange, in order that they may have a 
market among investors in securities, who naturally 
look to such a source for information concerning the 
value and regularity of the issue offered for sale. 

Such Exchanges have rules for the protection of 
their members and the public which must be complied 
with; a copy of that portion of the By-Laws of the 
Chicago Stock Exchange is given in the Appendix,* 
and the conditions there imposed are similar in all 
respects to those of such Exchanges in other cities. 



Raising If the corporation is legally formed 

of Additional w ith due consideration for its possible 

capital. future developments and financial needs, 

and the business has been legitimately and success- 



* Page 245. 



fully conducted, and its books and records accurately 
and systematically kept, the question of raising addi- 
tional capital is comparatively a simple one, and its 
acquirement is based primarily upon the financial re- 
sponsibility and business prospects of such an enter- 
prise. 

Conditions that influence sales of stocks and bonds 
are often created at the time of the organization of the 
corporation creating them. It is when some or all of 
the foregoing features are lacking that difficulties are 
encountered and failures occur, where the business 
itself would otherwise justify a different result. And, 
it might be added, that the majority of failures are, in 
some measure at least, due to the fact that the proper 
attention has not been given to some practical ques- 
tion concerning the organization, or other essential 
matters, at the inception of the undertaking. 

When the corporation is confronted with embar- 
rassing questions of finance, the defects, if any, in its 
formation or subsequent conduct " stand out in bold 
relief," and often make it quite impossible to accom- 
plish the result desired, without a reorganization.* 

Capital is a power well known to the average pos- 
sessor, and it is necessary to take this fact into con- 
sideration when it is sought after ; then, the viewpoint 
of the man with money must also be taken into account. 

♦See "Reorganization," page 115. 



62 BAISING OF ADDITIONAL CAPITAL. 

While there are many selfish and grasping persons, 
the average business man looking for a business oppor- 
tunity is fair and reasonable from his point of view; 
and if that can be ascertained, and his requirements 
fulfilled, the matter of interesting him in a business 
is simplified. 

The business corporations which are ordinarily 
seeking capital might properly be included within the 
following three general classifications, and they will 
therefore be here adopted, and considered in their 
order, namely: 

First: The new undertaking which has passed 
through the experimental period (which is usually the 
first year), and finds itself without sufficient capital 
to accomplish the original objects. 

Second: The established business which has been 
built up by a firm or individual, and transferred to 
a corporation, but for some reason the capital at its 
disposal proves insufficient. 

Third: The business with visionary plans, and 
whose objects are impractical, desiring to obtain capi- 
tal for its conduct or continued operation. 

In considering the first class of enterprises named 
it will be assumed that all necessary and proper steps 
have been taken in the organization, and that the 
business itself is of recognized merit. It is also here 
assumed that no mistakes had been made, either in 



RAISING OF ADDITIONAL CAPITAL.. 63 

the domicil, amount of capitalization, or other practi- 
cal features, and also, that the business itself shows 
a fair and reasonable prospect for ultimate success. 

In this case, as in all others, the particular circum- 
stances must govern ; but generally the increasing of the 
capital stock of such a company is the most satisfac- 
tory method to acquire additional capital, particularly 
from a financial standpoint. Of course, the sale of 
such stock is necessary, and if the business will admit 
of additional executive assistance, the inducement to 
an investor of filling an office of responsibility — with 
reasonable compensation — is always a great help and 
an important element in effecting such a sale. 

The sale of a large issue of stock is always difficult, 
unless the corporation is well known, in the hands of 
recognized dealers in the line of business, or its stock 
is listed on the local Stock Exchange. 

The issuance of bonds or preferred stock with a 
common stock bonus, is always to be discouraged from 
a business standpoint, if from no other; and the con- 
servative man of money is rarely, if ever, influenced 
thereby. 

Many of the questions here presented have been 
already considered in determining the capitalization 
of a new corporation — under the preceding heading — 
and therefore need not be repeated; the general prin- 
ciples there announced will be found useful in the solu- 



64 RAISING OF ADDITIONAL. CAPITAL. 

tion of questions of finance whenever a business falling 
within this classification requires financial assistance. 

The next class of business corporations seeking cap- 
ital, and referred to above, are not as numerous as the 
first. For, assuming that no mistakes have been made 
in the essential features of reorganization and that 
the business is established, little difficulty should be 
met in raising any reasonable amount of necessary 
capital consistent with the security to be given. 

Here we are also confronted with the peculiar, im- 
portant circumstances which surround every case of 
this character. Generally such a business has assets 
of a permanent nature — often a plant which would 
readily be accepted as ample security for a bond issue 
sufficient to provide the necessary working capital; 
and where this can be done to advantage, it is well to 
be considered, as such bonds usually are salable at 
par, and bear a low rate of interest and can be made 
to mature far enough in the future to make such a 
plan advisable from every standpoint. 

Then the question of changing location is to be con- 
sidered here, as it is in the class of companies first 
above named; numerous outlying towns and localities 
desire additional manufacturing industries, and they 
are frequently prepared to provide locations and 
financial assistance, either in the form of a bonus, 
or by subscribing for a certain amount of additional 



RAISING OF ADDITIONAL CAPITAL. 65 

capital stock. These opportunities may be investi- 
gated, and reliable information obtained by consult- 
ing the Industrial Agents of the various railroads, 
whose business it is to give assistance in such mat- 
ters, both to the industry seeking a location and to the 
town in procuring the enterprise desired. 

The third class of enterprises named comprise the 
majority of the seekers after capital, and this fact 
alone makes it more difficult for the legitimate and 
worthy enterprises to secure such assistance. 

Manifestly, the greatest benefit to all persons in- 
terested in such a company would be to wind up its 
affairs as speedily and economically as possible; but 
it is safe to predict that few readers of this book will 
ever concede that their undertakings or business ven- 
tures fall within the lines here drawn. 

It is surprising, however, to know the large per- 
centage of enterprises struggling to keep alive and 
going which in reality may be fairly considered within 
this class. 

It is not infrequent, however, for the lawyer to be 
called upon to scrutinize the affairs of such enter- 
prises, and he should be qualified and ready to advise 
his client, not alone upon the legal status of affairs but 
upon the general aspect of the business and its pros- 
pects. This he may do by simply investigating along 
lines that are well defined and demonstrated by ex- 



66 RAISING OF ADDITIONAL CAPITAL. 

perience. For instance, a company that to all intents 
and purposes has "stock-jobbing"* for its principal 
object should be avoided and condemned; a company 
organized for the purpose of conducting some specu- 
lative venture at a great distance is suspicious ; a busi- 
ness with vast natural resources wanting "a small 
amount of money for development purposes," which 
should readily be obtained upon the company's alleged 
assets, is usually a fraud; the company that has been 
incorporated without an established business for a 
nucleus, and is dependent upon the sale of its stock 
for working capital, and which has sold a portion of 
its stock to a number of small investors, the proceeds 
received from such sale being insufficient to dem- 
onstrate the success of the business contemplated, or to 
materially advance it beyond the organization or ex- 
perimental period, is, as a rule, of doubtful prospects 
— and so on. 

In fact the earmarks of unworthiness are as appar- 
ent in a business enterprise as elsewhere, and are dis- 
cernible by proper investigation, and knowledge of the 
affairs investigated. 

No one is justified in undertaking a business venture 
without at least the moderate capital usually required 
to carry it on (or the means of raising such capital), 
and trusting to financial accommodations and credit 

♦See "Stock-Jobbing," page 129. 



RAISING OF ADDITIONAL CAPITAL. 67 

or success. It is undoubtedly true that no one who 

as tried to establish a business without a suitable 

pital, even if he has succeeded, would advise another 

o attempt to do likewise ; for it involves an amount of 

ety, labor, embarrassment and hazard which is 

pleasant to reflect upon. To do business altogether 

>n credit requires a fortunate combination of circum- 

tances to make it successful that no prudent man 

ould predict. 

It might be said with propriety that the universal 
law of trade is that the enterprise which attempts to 
conduct its business upon borrowed capital alone must 
sooner or later fail — that is, where the company at- 
tempts to conduct its business upon financial accom- 
modations secured from regular sources, such as bank- 
ing houses, brokers, etc., upon trade paper. At the 
same time, a company may do a large increased 
volume of business upon such accommodations ; in fact, 
a large Chicago corporation practically conducts the 
principal volume of its business upon funds secured in 
that way, and loans its own capital through banking 
and regular financial channels, upon a higher rate of 
interest than it is required to pay for its own accom- 
modation. But it is not such a corporation as the 
ordinary business enterprise could safely imitate; its 
securities or trade paper could be converted into 



68 RAISING OF ADDITIONAL CAPITAL. 

money at any time and under any circumstances, with- 
out difficulty. 

There is a tendency among aggressive business men 
to "mortgage the future," so to speak, and this with- 
out regard to repayment. The securing of judicious, 
long-time loans upon a bond issue where the busi- 
ness requires additional capital, is not alone a saving 
in the rate of interest but renders the undertaking less 
hazardous, and more convenient and certain of pay- 
ment out of the profits that may be safely estimated; 
besides, the bonds of a staple business concern, with 
tangible assets, are invariably in good favor with in- 
vestors. The practical questions concerning the issu- 
ing of such bonds and preferred stock as well, have 
already been considered.* 

In regard to the extent to which the credit of a 
business enterprise may safely be extended — that is, 
the proportion which the capital of an enterprise 
should bear to its liabilities — necessarily varies with 
conditions. It has been stated, however, by eminent 
and experienced financiers that a man should not ex- 
tend his business more than three times the amount 
of his capital under the most favorable circumstances, 
and if it be a large business, not more than twice his 
capital. 

We have already alluded to what has proven to be 

♦See "Capital, Bonds and Stocks," also "Capitalization of Corporations." 



TRANSFERRING AN ESTABLISHED BUSINESS, 69 

a very satisfactory method for the raising of addi- 
tional capital, under ordinary circumstances, and that 
is by the issuance of bonds, drawing a reasonable rate 
of interest, that may be convertible into stock within 
a certain given period, at the option of the holder. 
This enables the purchaser of such bonds to avail him- 
self of the privilege of becoming a stockholder at any 
time within the period provided in such bonds, should 
he so elect, after the business has demonstrated its 
merit, and the enterprise is thereby provided with the 
necessary additional capital, which it can repay out of 
the profits. 

Many business men will readily invest in such bonds, 
with the privilege of changing the form of investment 
after the business is established, who would not in the 
first instance purchase stock. 



The topic of this section has fur- 
Tin \ n n i s ^ e d the material for much of the un- 
Estabiished favorable criticism which has been made 
Business to upon the corporate plan and abuses of 
a corpora- ^ cor p 0ra t e system; and this is made 

Hon. . 

the subject of a separate discussion un- 
der appropriate headings.* At the same time, some 

♦See "Consolidation of Enterprises" and "Stock- Jobbing." 



70 TKANSFEKRING AN ESTABLISHED BUSINESS. 

of the legitimate advantages offered through the con- 
summation of transactions of this character have 
already been pointed ont.f 

In the preceding pages we have necessarily dis- 
cussed many of the important questions pertaining to, 
and which invariably arise in the transferring of an 
established business to a corporation. Those hereto- 
fore discussed have had to do with the advance finan- 
cial arrangements and objects to be accomplished 
rather than to the subsequent rights of the parties to 
be protected. In the following pages particular atten- 
tion is given to the substantial benefits to be derived 
from the corporate plan of conducting business, as 
well as the rights of the parties interested therein. 

It is through transactions of this character that 
advantages are obtained by the owners of a business, 
such as the preservation of the good will, facilitating 
the sale of a part or the whole of the business, and the 
obtaining of an advantageous price for the business 
transferred, etc. 

The opportunity last referred to is frequently 
abused; that is, the valuation placed upon a business 
about to be transferred to a corporation is inflated, 
and the question frequently occurs "to what extent 
may a business or property be over- valued without 
rendering the parties in interest liable therefor?" 

tSee "The Corporation and Its Advantages." 



TRANSFERRING AN ESTABLISHED BUSINESS. 71 

This question has been the subject of much litiga- 
tion, and different courts have taken different views 
thereon. Without attempting to enumerate the rules 
announced in the various decisions, the most favored 
rule, and the one to be everywhere regarded as safe, 
reliable and sound, is that if the directors act in good 
faith, and the property transferred has a substantial 
value, and there is no fraud connected with the trans- 
fer, their valuation is final, even if excessive. 

A different rule, however, obtains in some of the 
States, where the statutes make the action of the 
Board of Directors in relation to such matters final in 
the absence of actual fraud. This rule obtains in Dela- 
ware, Maine, New Jersey and New York ; and in some 
States, where mines and mining is the chief subject 
of corporate organizations, this rule is recognized 
either by statute or by the courts to encourage de- 
velopment of the States mining resources. 

More latitude is everywhere allowed in the valua- 
tion of what are known as speculative assets than 
where the property is staple and easily valued ; and in 
every case the question of what the property is worth 
to the corporation, rather than what it is worth to the 
individuals selling, will govern. 

A business that has been established by an individ- 
ual or an association of individuals under a firm name, 
usually possesses a valuable property right in the 



72 TRANSFERRING AN ESTABLISHED BUSINESS. 

name itself — which is in reality the subject-matter of 
the good will. While the good will of a firm, or 
individual doing business alone, may be the subject of 
transfer and sale, and therefore valued and conveyed, 
still it is never possible to utilize and protect this form 
of property, or obtain its full value, except by trans- 
ferring the same to a corporation. The reason of this 
is that while the trade name may be thoroughly estab- 
lished and the means of influencing trade, it is, in a 
measure, perishable, and loses much of its value once 
the individuals who have created it are known to be 
no longer its owners; while if it is transferred to a 
corporation organized by the same persons who es- 
tablished the name, it becomes permanently associated 
with the corporation and with the other advantages 
that accrue to the trade name of a corporation (that 
are not possible to an individual) it thereby derives 
a permanency and utility that cannot be lost. 

It is these and other considerations which justify 
the adequate valuation of the immaterial assets of a 
firm or co-partnership when transferring the same to a 
corporation for the ultimate purpose of effecting an 
advantageous sale — enlargement or permanent estab- 
lishment of a business. 

There is much of the "personal relation" existing 
between the proprietor of a business conducted by an 
individual or co-partnership and the patrons thereof 



TRANSFERRING AN ESTABLISHED BUSINESS. 73 

that has its advantages, and in some degree at least 
— and in certain forms of enterprises — may argue in 
favor of the personal as against the impersonal, i. e., 
corporation relation ; but the details of the business of 
a corporation can and should be so organized as to 
overcome this objection — that is, by creating personal 
responsibility, if not a personal interest, for depart- 
ment heads in the various important departments of 
the corporation, and in that way retain the personal 
interest and responsibility so essential to the welfare 
of every business conducted upon the competitive sys- 
tem. 

As to the approved manner of transferring assets 
of an established business to a corporation for money, 
bonds or in payment for its stock: If the business is 
to be valued and purchased from an inventory, where 
the property conveyed is itemized, the resolution of 
the Board of Directors taking over or purchasing such 
property should recite that the property had been 
itemized and valued at the aggregate sum of whatever 
is to be paid for the business conveyed; and the inven- 
tory may, with propriety, be copied and made a part 
of the bill of sale. If, on the other hand, the business 
is purchased in bulk — or the amount of property esti- 
mated — then the resolution of the Board should recite 
that the property had been appraised in bulk and val- 



74 TBANSFEBBING AN ESTABLISHED BUSINESS. 

ued by the Directors at the total amount to be paid 
therefor. 

It is essential that all due formality should be ob- 
served in the purchase and transfer of assets to a cor- 
poration in payment for its stock or otherwise, and 
where it is feasible, the proposition to sell should be 
made to the corporation by formal writing. This will 
enable the officers to make proper investigation of the 
business offered, and at the same time the written 
proposition will form the basis of an appropriate reso- 
lution of purchase and a complete contract of sale 
when accepted. 

If there is real estate involved in the transfer, 
naturally the title will be carefully examined by com- 
petent legal counsel, before passing upon the proposi- 
tion to purchase; and in such cases the resolution 
should recite that such examination had been made 
and the title found merchantable or otherwise, and 
that the proper conveyance or title deed had been exe- 
cuted by the owner or owners and tendered to the cor- 
poration at the time of the proposed formal acceptance 
of the offer by the Board of Directors. 

In the Appendix hereto, will be found a general 
form of resolution which, according to the facts there 
assumed, purports to purchase and take over — through 
the commissioners appointed by the Secretary of State 



TEANSFEBRING AN ESTABLISHED BUSINESS. 75 

of Illinois — from a corporation that is in the process 
of reorganization, an established business in payment 
for stock subscribed for by the reorganizer mentioned 
in the Eeorganization Certificate shown.* The reso- 
lution there given will suggest the method, and also 
the form of resolution applicable for the purchase of 
any established business by a corporation except that 
in the case there assumed no written proposition was 
made or necessary, on account of the fact that the 
purchasing company was incorporated for the express 
purpose of operating the business purchased, and the 
directors are assumed to be all the stockholders as 
well, and all present and acquiesce in the terms of pur- 
chase and sale. In such a case, the peculiar facts there 
assumed (for the purpose of illustrating an approved 
plan of effecting a reorganization which will be fur- 
ther explained under a subsequent heading), dispense 
with such written proposition. 

In every case where a business is transferred from 
one or more of the directors, or parties in interest, 
to the corporation, it is always advisable to have the 
formal consent of the stockholders to such a purchase ; 
and this may be done by convening a special meeting 
of the stockholders for that purpose, and submitting 
the question of purchase to a vote, and having the 

j *See form, page 209. 



76 TRANSFERRING AN ESTABLISHED BUSINESS. 

action of the stockholders in that regard, a matter of 
record. Such a resolution would simply recite the 
facts, and authorize and direct the Board of Directors 
to consummate the transaction and purchase the busi- 
ness at a given price, or at the best price obtainable. 
And, it might be added, that the consent of the stock- 
holders to the acquiring of a separate business, or to 
the transaction of any unusual important business, is 
always to be recommended. Particularly is this ad- 
visable where the stockholders are few, or the cor- 
poration small. 

In acquiring property a business corporation usu- 
ally stands in the same position as that of an indi- 
vidual, and all the important questions that would con- 
cern a natural person relating to title, incumbrances, 
right to transfer, etc., are necessarily present ; so when 
a going business is acquired by one corporation from 
another it is necessary to see that all formalities are 
observed by the selling corporation as well, and that 
lawful authority is obtained to make such sale. 

At common law the sale of a going solvent and pros- 
perous business could not be effected without the unan- 
imous consent of all stockholders of such corpora- 
tion; however, the statutes of the various states fur- 
nish authority for such transfers, but require the con- 
sent of a majority of the capital stock issued, usually 
two-thirds. If, however, the selling corporation is in- 
solvent or in a failing condition, or unable to succeed 
in its undertaking, a recital of such facts in the resolu- 
tion of sale will usually authorize a sale of all the com- 
pany's assets by the Board of Directors alone. 



CORPORATE MANAGEMENT 



Frank's "Science of Organization" etc. 



CHAPTER ni. 

CORPORATE MANAGEMENT. 

Directors, Officers — Their Duties and Liabilities. 

Stockholders' Rights and Liabilities. 

By-Laws and Their Uses. 

Corporate Records and Books of Account. 

Examination of Books and Records. 

_, The duties and liabilities of a director 

Directo r s 

and officers. °f a business corporation are co-exten- 
Tneir Duties sive — that is, his powers and authority 

and Liabil- Qn ^ e one ^^ are f sue } 1 a nature 
ities. 

that they lead to a corresponding re- 
sponsibility both to the corporation and its creditors. 
As has been heretofore shown, the authority to bind 
the corporation emanates from the Board of Directors; 
and in consequence, the officers are responsible to 
them. The officers are chosen by the Board of Direct- 
ors, and, unless restricted by the by-laws, they may 
be removed by the Board for sufficient cause; and if 
the by-laws so provide, any officer may be removed at 
the pleasure of the Board. 

Directors cannot, however, act individually; they 
must do so as a body. That is, no legislation on be- 

(79) 



80 DIRECTORS, OFFICERS — DUTIES AND LIABILITIES. 

half of the corporation can be enacted except by the 
Board in meeting assembled, and the will of the Board 
when thus indicated, is to be carried into effect by the 
officers of the corporation. 

The peculiar characteristics of a corporation often 
renders notice to a director or officer also notice to the 
corporation; and this is important in relation to the 
conduct of all corporate business; such notice simply 
means information. 

In order to charge a corporation with such notice, 
however, the directors or officers must be shown to be 
acting for the corporation at the time the notice is 
received, and also that the employment of the director 
or officer concerns the subject-matter of the notice; in 
other words, the director or officer must be then 
engaged for the corporation in such a way as to ren- 
der the notice appropriate to his office or employ- 
ment. 

Notice to a Board of Directors while assembled, 
and such notice to one of them, who afterward com- 
municates the same to the Board in session, is suffi- 
cient notice to the corporation in any event. 

Under the common law, directors are liable for issu- 
ing stock as fully paid, when in fact the same is not 
so. They are also liable for the payment of dividends 
out of the capital stock of the company, and for any 
ultra vires acts and fraud generally, as well as for 



DIRECTORS, OFFICERS DUTIES AND LIABILITIES. 81 

egligence which results in a loss to the corporation, 
other words, they are responsible for many acts of 
»mission, as well as commission. 
Under the statutes of the various States they have 
further liability imposed, whereby they are held to 
e responsibility of a trustee under certain circum- 
ances. They are always trustees for the creditors 
a corporation, and also in certain dealings in rela- 
ion to the property of it. The question of their deal- 
ing directly with the corporation is frequently the sub- 
ject of litigation, and they are invariably held to a 
strict rule of conduct in such matters. 

A business corporation has no power or authority 
to loan money, except it be to further the ends of its 
business; hence it could not lawfully do so to a di- 
rector. And the rule that one cannot properly oc- 
cupy the dual position of buyer and seller is particu- 
larly applicable to directors of such companies — to the 
extent that any secret advantage thus acquired may 
be recovered from such directors. At the same time, 
! they may not abuse any information acquired as a 
director, or obtain secret advantages therefrom to the 
detriment of the company. 

A safe rule for the director to adopt is to act in all 
things pertaining to his office and the company of 
which he is such a director in the same way as he 
would act if the business transacted for the corpora- 
tion was his own exclusively. 



82 DIRECTORS, OFFICERS — DUTIES AND LIABILITIES. 

A director is not disqualified to act in any official 
capacity for his corporation on account of his being a 
director. In fact, it is usual for directors to be also 
the officers of the corporation. Particularly is this 
true in small or medium-sized companies. 

It is always necessary that there should be a Presi- 
dent and Secretary in every business corporation, and 
it is usual and necessary under the laws of some 
States (e. g. } Illinois) to have a Treasurer, as well. 

The number of officers that a company may have 
is only limited by the will of the Board of Directors. 
It is frequently provided by the by-laws that cer- 
tain officers of the corporation should also be direct- 
ors, and this is proper and convenient; for, if they 
are directors as well as officers, they are at all times 
conversant with the consensus of opinion of the Board 
in relation to its policy, and upon all matters pertain- 
ing to the business. 

The powers and duties of the officers of a corpora- 
tion depend entirely upon the provisions of the by- 
laws, and the delegating of such powers, and the 
classification and the stating of the duties of the 
various officers is a subject that should receive special 
attention at the time of the organization of every cor- 
poration. 

By properly defining the powers and responsibilities 
of each officer the best possible results are obtained, 



DIRECTORS, OFFICERS — DUTIES AND LIABILITIES. 83 

d each officer has a certain clearly-defined responsi- 
bility; besides, any possibility of controversy over con- 
flicting authority is thereby averted. 

The compensation of both directors and officers is 
a proper question for the directors themselves; it is 
a proper subject of resolution by the Board of Direct- 
ors, enacted and recorded on the records of the cor- 
poration prior to the performance of the service in 
question, and unless abused, the action of the directors 
in this regard is final. 

Directors are not entitled to compensation unless 
it is expressly provided that they shall receive pay 
for their services; and a salary voted to a director 
after the services have been performed is voidable by 
the stockholders. Directors are usually vitally inter- 
ested in the corporate enterprise, and their election 
as directors is usually due to that fact. A director 
who performs extra services, outside of his duties as 
a director, however, may be entitled to compensation 
therefor. 

The established rule concerning compensation of 
i directors is that authority for its payment must be 
obtained without fraud, either actual or constructive, 
and that the amount thereof must be reasonable for 
the services performed. 

A salary paid to directors under certain circum- 
stances, e. g., when the corporation is insolvent or 



84 DIKECTOKS, OFFICEKS DUTIES AND LIABILITIES. 

financially embarrassed, or where the amount is 
excessive or paid out of the capital of the corporation 
to the detriment of the stockholders, may be recovered 
from the directors by an appropriate proceeding. 

Another familiar principle concerning compensation 
of directors and officers alike is that where the salary 
is authorized by the vote of the party receiving it — 
that is, if his vote is necessary to its creation — such 
compensation is illegal. At the same time proper 
and adequate compensation may be voted directors 
and officers, and the amount of such compensation 
must be governed by the circumstances of the particu- 
lar case. 

There is a growing disposition among legislators 
generally to increase the visitorial power of the 
State over corporations, and to this end require cer- 
tain reports to be made by officers periodically con- 
cerning their affairs, such as the furnishing of names 
and addresses of all directors and officers; whether 
the corporation is availing itself of the privileges con- 
ferred by its charter; the amount of the capital stock 
paid in since its organization, etc., and providing cer- 
tain penalties and responsibilities for such officers for 
the failure to comply therewith. In addition to such 
penalties imposed by the State, an officer may be held 
liable to the corporation for any injury resulting from 
his negligence or failure to comply with such laws; 



DIRECTORS, OFFICERS DUTIES AND LIABILITIES. 85 

and generally an officer may be held liable to the cor- 
poration for all negligence or fraud. 

Nearly all the States now have special laws regulat- 
ing foreign corporations; that is, where corporations 
organize in one State and undertake to do business in 
another, in the latter State they are regarded as "for- 
eign corporations." The special acts of the various 
States in relation to such foreign corporations are far- 
reaching in their effect, as will be seen upon reference 
to the copy of such Act now in force in the State of 
Illinois, given in the Appendix.* It will be observed 
that in Illinois a foreign corporation is obliged to com- 
ply with the act referred to, before doing business in 
the State. What constitutes "doing business" means 
the establishment of a local agency or branch for the 
carrying on of the business ; in which event, it is neces- 
sary to designate some person upon whom service of 
process can be had in case of litigation, and to other- 
wise comply with such act. Upon the failure of such 
foreign corporations to comply with the terms of such 
local laws, no contract can be enforced by it in the 
foreign State; and it has been held in Illinois that 
subsequent compliance with such provision of the law 
will not entitle such foreign corporations to enforce a 
contract that was made prior to such compliance. 

* Page 258. 



86 stockholders' rights and liabilities. 

The functions of stockholders in a 

Stockhold- 
ers' Rights business corporation are limited; the 

and Liabii- general and principal rights of the 
ities# stockholder are (a), to form the cor- 

poration, or bring it into existence in the first instance ; 

(b) to elect its Board of Directors from time to time ; 

(c) to make its by-laws, unless that power is delegated 
to the directors; (d) to increase or decrease the capital 
stock; (e) to authorize all amendments to the charter; 
(f ) to participate in the dividends ; (g) to dissolve the 
corporation ; (h) to authorize the giving of mortgages, 
in case the statutes of the State require it; (i) to 
examine the books and records of the corporation at all 
reasonable times; (j) to pass upon the necessity or 
advisability of the sale of the entire business. 

The liabilities of a stockholder are even less than his 
rights as such. It might be said, if the corpora- 
tion is regularly and legally formed, that the stock- 
holder's liabilities are limited to the unpaid portion — 
if any — of the stock held by him; and unless the laws 
of the State under which the corporation is formed 
are complied with the stockholders are liable in the 
same manner and to the same extent as partners. 

In some States the stockholder has a liability in 
addition to the par value of his stock. This liability is 
imposed by the statutes of such States. Such liability 
is strictly construed by the courts where the same 



STOCKHOLDER ' RIGHTS AND LIABILITIES. 87 

exists, and it is now confined to but a few States, and 
the tendency is to abolish it altogether. 

In discussing the liabilities of a stockholder, they 
will be referred to in the order in which they naturally 
arise — that is, the liability of an original stockholder 
for any unpaid portion of the stock standing in his 
name, and in connection therewith, the liability of the 
transferee of such stock. 

Most of the States hold the transferee liable jointly 
with the original subscriber or owner of stock, where 
the same has not been fully paid for at the time the 
stock was issued. 

It has been already shown that stock originally 
issued upon inadequate consideration, i. e., where 
property has been fraudulently accepted by the direc- 
tors in exchange for stock, or where the value of the 
property has been flagrantly inflated, is not thereby 
paid for, even as between the corporation and the 
seller, notwithstanding the stock certificate upon its 
face purports to be " fully paid and non-assessible." 
In such cases, the transferee is liable jointly with the 
transferor (especially to creditors of the corporation) 
for the differences between the value of the property 
received by the corporation and the par value of the 
stock issued therefor. 

Where the statutes of a State do not make the action 
of the Board of Directors in this regard final in any 



88 stockholders' eights and liabilities. 

event, the above mentioned rule applies to both the 
original owner of the stock and any subsequent trans- 
feree; and the only difficulty in determining the lia- 
bility of a subsequent stockholder in such a case is to 
establish sufficient notice to the transferee of unpaid 
stock, or to determine what circumstances or state of 
facts will constitute legal notice that the stock 
accepted by him is not fully paid, when the stock cer- 
tificate recites on its face that the stock thereby rep- 
resented is fully paid and non-assessible. 

The rule laid down in Illinois is that an exchange 
of property for stock in a corporation must constitute 
a valid contract of bargain and sale in good faith and 
by the result of honest judgment of the Board of 
Directors of the corporation accepting such property, 
or the person to whom such stock is issued is liable, 
both to the corporation and its creditors for the dif- 
ference between the actual value of the property con- 
veyed and the face or par value of the stock received ; 
and as to what constitutes constructive notice to a 
subsequent purchaser of such stock may be illustrated 
by a leading case in Illinois on that question : 

A corporation was organized for $1,000,000, and all 
its stock, excepting two shares, was issued for an 
interest in a patent. The stock certificates issued for 
this invention recited on their face that the capital 
stock represented thereby was " fully paid and non- 



STOCKHOLDEKS* EIGHTS AND LIABILITIES. 89 

assessible." Some of this stock was sold or conveyed 
to a third party, namely, one who was not originally 
connected with the organization of the corporation. 
The corporation in question failed, and the creditors 
instituted appropriate proceedings for the purpose of 
holding the assignee of such stock jointly liable with 
the original owner. 

In holding that the transferee was liable as con- 
tended, the Supreme Court of Illinois said: "It is 
not conceivable that a person of ordinary intelligence 
and prudence buying shares of stock in such a cor- 
poration would not become advised as to what prop- 
erty the corporation had. * * # It is clear that 
appellees knew that the corporation had no money and 
no property aside from the patent, and it would not be 
creditable to them to say that they believed the pat- 
ent to be worth $999,800.' ' * * # "We regard the 
proof as establishing the fact of notice to appellees 
of the transaction and over- valuation. They knew 
that the corporation did not have a paid-up capital of 
$1,000,000 and that * * * had not paid for the 
stock, unless it was given for the patent.' ' 

Hence it will be seen that not only the original sub- 
scribers of stock may be liable for any unpaid portion 
thereof, but that in many cases subsequent owners of 
such stock may be likewise liable. In the language of 
the Illinois Supreme Court: "The relation of the 



90 STOCKHOLDERS ' RIGHTS AND LIABILITIES. 

stockholder who has not paid for his stock, to the cor- 
poration or the creditors, is the ordinary one of 
debtor." 

The presumption is that a corporation has, or at 
some time had, money or property equal in value to 
the amount of its capital stock, and creditors have a 
right to presume that such is the case ; hence the issu- 
ing of stock for less than the par value is ordinarily 
held to be a fraud upon the law, creditors and sub- 
sequent purchasers. It is ultra vires of the corpora- 
tion to issue stock for less than its face value in money, 
and creditors (and under certain circumstances other 
stockholders) may insist upon the balance being paid 
into the treasury. 

There is a rule, however, that where a corporation 
has increased its capital stock, and becomes insolvent, 
it may then issue any portion of such increased stock 
for the best price obtainable and no one will be liable 
therein, especially to existing creditors; but such a 
practice is not to be encouraged, particularly where 
the rights of subsequent creditors are to be considered. 

One of the fundamental principles in the law of cor- 
porations is that the majority may exercise the right 
to control the corporation's affairs. This right has 
suggested many opportunities for the perpetration of 
fraud upon the minority stockholders, and the re- 
peated instances of such attempts which have come 



stockholders' rights and liabilities. 91 

before the courts of last resort have developed a sys- 
tem of jurisprudence for the protection of the minority 
stockholder. 

Some of the familiar methods of attempting to take 
advantage of the minority stockholder is for the 
majority to vote large salaries to themselves, with- 
hold dividends, incorporate an auxiliary enterprise, 
and favor such undertaking at the expense of the 
parent company, and various other devices, which all 
tend to the same result, namely, the detriment of the 
minority stockholder. 

Majority stockholders, through directors who are 
their tools, often perpetrate such wrongs for their 
direct benefit. The dummy director is now an old de- 
vice in the law of corporations, and courts of equity 
are inclined to look behind all such devices to ascertain 
the real parties in interest. 

The language of the United States Supreme Court 
announces the modern rule in relation to this subject, 
to-wit: "When a number of stockholders combine to 
constitute themselves a majority in order to control 
the corporation as they see fit, they become for all 
practical purposes the corporation itself, and assume 
the trust relation occupied by the corporation toward 
its stockholders. " 

While courts of equity will interfere for the protec- 
tion of minority stockholders, they will not undertake 



92 stockholders' eights and liabilities. 

to control the policy or business methods of the cor- 
poration, so long as they are conducted in good faith, 
although it may be seen that a wiser policy might be 
adopted, and the business more successfully conducted 
if other methods were pursued. It is in cases of fraud, 
or where some undue advantage is being taken of the 
minority stockholders, that courts will intervene and 
afford relief. 

It is not infrequent that stockholders undertake to 
make an agreement among themselves whereby cer- 
tain policies shall be carried out; that is, where cer- 
tain individuals shall be retained in office, and other- 
wise attempt to regulate the voting of stock, and in 
that way control the corporation. 

Another, and not unusual question, is that of limit- 
ing the sale of stock either to a class of persons, or to 
give one another the first opportunity and right to 
purchase stock which may be offered for sale. All of 
these objects are difficult to accomplish, for the reason 
that they are fundamentally against public policy. 

Any contract which amounts to an unreasonable 
restraint of trade is illegal — that is, where the contract 
attempts to perpetually or unreasonably deprive the 
stockholder of his right to sell or control stock, or 
his right to vote thereon; but an agreement to place 
stock in escrow for a reasonable time to accomplish a 
lawful purpose or to insure the right to purchase such 



STOCKHOLDERS ' RIGHTS AND LIABILITIES. 93 

S'cock at a given price is legal. And a condition in- 
serted in the body of the stock certificate, regulating 
the transfer of such stock, either to a class of stock- 
holders, such as dealers in a given line of trade, or to 
existing members may be legal. 

In addition to the foregoing, any lawful object may 
be accomplished in the regulating of transfers of stock, 
but as before intimated, the terms employed in accom- 
plishing such objects must necessarily receive care- 
ful attention. 

A stockholder's right to vote upon his stock, either 
in person or by proxy, is necessarily an important one. 
In order that the minority stockholder may have repre- 
sentation in the directory, the laws of most States 
provide what is termed, "cumulative" voting; e. g. y 
where the number of directors is five, and the stock- 
holder votes his shares of stock under the cumulative 
system, he would have five votes for each share of 
stock held by him, which he could cast for one director, 
or divide them among the five, as he may choose. 

In case a stockholder cannot be present at the meet- 
ing of the stockholders of his corporation, he may 
appoint a 'proxy (to represent him), with full power to 
exercise all the rights of a stockholder ; a proper form 
of such proxy will be found in the Appendix.* Such 
proxies may be made for a single meeting or for a 

♦Page 243, 



94 BY-LAWS AND THEIR USES. 

given length of time, and until acted upon, they are 
subject to be revoked at the will of the stockholder. 



By-Laws ^ e importance of a proper code of 
and Their by-laws for the government of a cor- 
uses. poration cannot be overestimated. They 

are the internal law for the government of the cor- 
poration itself; the duties and powers of its officers 
emanate from them, and the rights of the stockholders 
are often curtailed or enlarged by their provisions. 

By-laws may not contravene any provision of the 
charter itself or the laws of the State under which it 
owes its existence, nor the common law, or be against 
public policy or the laws of the land, and they may 
not be inequitable or unjust or unreasonable in their 
nature. 

Aside from these limitations they may contain any 
rule or provisions that the framer may choose to in- 
corporate therein. 

It is always wise to include in the by-laws of a new 
company the well-settled rules of law of the State of 
its creation, governing its conduct for the guidance 
of the directors and officers. Frequently it is desired 
that the duties as well as the authority of each officer 
should be clearly and minutely defined in order that no 
conflict between such officers shall occur, and this is 



BY-LAWS AND THEIR USES. 95 

always to be commended where such a course is prac- 
ticable or feasible, but in small companies it is unwise 
to burden and handicap the management with unneces- 
sary rules which would interfere with the conduct of 
the business itself. 

Every stockholder and officer is bound by the lawful 
provisions of the by-laws, and this whether they ever 
consented to their enactment or ever knew of their 
existence, but there is a different rule obtaining in 
regard to the public. The by-laws of a corporation 
should not affect strangers dealing with the corpora- 
tion, and the violation of a rule contained in the 
by-laws will not relieve the corporation from liability to 
third persons. At the same time, creditors may insist 
that the provisions of the by-laws shall be enforced, 
and, of course, the stockholders have the same right 

Forfeitures, fines and the like can only be enforced 
through and in accordance with the by-laws, unless 
there are statutory provisions therefor; and the ques- 
tion of a stockholder's right to vote may be — within 
certain lawful limits — regulated thereby. 

It is impossible to suggest an arbitrary or " stock' f 
form of by-laws, as the exigencies and peculiar con- 
ditions of each organization must be taken into 
account; but the form of by-laws given in the Appendix 
hereto,* will be found satisfactory, or to contain use- 

* See page 217. 



96 BY-LAWS AND THEIB USES. 

fill suggestions in the preparation of such by-laws for 
any ordinary corporation, particularly where it is 
organized under the laws of Illinois. 

In the organization of companies under the laws of 
the various States, the by-laws should be drawn in 
conformity with such local laws, and invariably re- 
quire the utmost skill in their preparation. 

The right to make by-laws is primarily in the stock- 
holders of the corporation, unless that power is dele- 
gated to the directors, either by charter provision or 
statute law of the State where the corporation is 
created. The tendency of modern legislators is to 
delegate the power to the directors of the corpora- 
tion, and where the right to make by-laws is vested 
in the directors, either by statutes or by the stock- 
holders themselves, the directors also have the power 
to amend or repeal the same. 

The difference between the by-laws of a corpora- 
tion and its formal resolutions is chiefly the perma- 
nency of the former. While both are subject to amend- 
ment or repeal, unless the power to act upon the reso- 
lution is limited by the by-laws, it is subject at all 
times to the will of the directors or stockholders, as 
the case may be. For this reason, it is customary to 
make the question of compensation of officers a sub- 
ject of special resolution, and to have such resolution 
embody the amount of the compensation to be voted, 



BY-LAWS AND THEIR USES. 97 

and to conclude with the phrase "subject to the fur- 
ther action of this Board." The purpose of this 
limitation is to make the compensation of an officer 
wholly subject to the will of the Board of Directors — 
that is, to leave the power and to facilitate the right 
to change such compensation as the circumstances may 
suggest. 

It is not infrequent that the directors and officers 
themselves violate or ignore important provisions of 
the by-laws. Where this has been done, it is well to 
ratify the acts done contrary to the provisions of the 
by-laws, where the same are not contrary to the in- 
terests of the corporation itself. Such ratification 
may be accomplished by proper resolution adopted by 
the Board of Directors in meeting assembled. 

It should be borne in mind that the by-laws of 
every corporation, as well as all important resolutions 
of the directors, should be accurately transcribed upon 
the Minute Book of the corporation, and preserved in 
this way.* In the case of large corporations it is not 
infrequent that the by-laws are printed and circu- 
lated among the members. 

♦Under the law of some jurisdictions (South Dakota, for instance), by-laws 
are not operative until so recorded. 



98 CORPORATE RECORDS AND BOOKS OF ACCOUNT, 

The books of account that are peculiar 

Corporate x 

Records and to corporations, and not in use by gen- 
Books of Ac- eral unincorporated concerns, are few. 
count. Tliey cons i s t generally of the Minute 

Book, Stock Certificate Book, Transfer Book and 
Stock Ledger. Aside from these, it is not unusual for 
the treasurer to have a Private Ledger in which to 
keep Controlling Accounts. Besides, it is customary 
for all modern business corporations to have a more 
strict and comprehensive System of Accounting, par- 
ticularly a complete Voucher System, by which an ac- 
curate and conclusive accounting can be furnished of 
all departments, and at any and all times, for the bene- 
fit and information of stockholders. 

The statutes of a few States of the Union require 
other corporate books to be kept, known as Books of 
Publicity, but they are the exception. 

Perhaps the book that is universally conceded to be 
first in importance among those peculiar to the cor- 
poration is its Minute Book— by which is meant the 
book wherein the acts and proceedings of the corpora- 
tion itself are recorded, and particularly the acts that 
require sanction or authority from the Board of 
Directors; and these include the Eecord of the Adop- 
tion, as well as a Transcript of the By-Laws and their 
Amendments. 

When the corporation is sufficiently large to justify 



CORPORATE RECORDS AND BOOKS OF ACCOUNT. 99 

it, there should be two separate Minute Books, one for 
the stockholders, and the other for the Board of Di- 
rectors, in which to record the meetings and proceed- 
ings of each; and these books should be securely bound. 

The most approved and convenient plan of keeping 
the Minute Book of the corporation is to have a Certi- 
fied Copy of the Charter attached to the first page of 
this book, or to have the secretary copy the Charter 
verbatim at the beginning thereof. Then the minutes 
of the organization meetings should follow in their 
proper order and dates. 

The By-Laws should be recorded elsewhere in the 
. Minute Book, preferably at the back, leaving enough 
unused pages after their recording to insert any and 
all amendments that may be made to the By-Laws. 
After this the minutes of each succeeding meeting 
should be recorded as they occur, following, of course, 
the meetings to organize. 

It is not necessary that the minutes of meetings be 
I written up at or immediately following the meeting to 
be recorded, nor is it necessary that the minutes be in 
the handwriting of the secretary; but it is advisable 
that the minutes of every meeting should be promptly 
recorded in order that no errors or omissions may be 
made, and in every case they should be signed, at least, 
by the secretary. 

Care should invariably be taken to preserve all 

I 



100 COEPOKATE EECOKDS AND BOOKS OF ACCOUNT. 

documents and writings coming into the hands of the 
secretary, such as proxies, original motions and reso- 
lutions that have been reduced to writing by the mem- 
ber offering the same. After such documentary rec- 
ords have been recorded they should be preserved for 
future reference or comparison. 

If the minutes of meetings are not taken in short- 
hand, there should be notes, at least, made of all im- 
portant transactions, and the minutes should then be 
written up from such notes. 

It is unquestionably advisable to approve the 
minutes of all meetings at the next succeeding regular 
meeting of the body, and this may be done by proper 
resolution after the same have been read; but the 
approval of the minutes of a regular or special meeting 
of a Board of Directors of a corporation cannot, in 
the absence of a special call being made therefor, be 
amended or approved at a subsequent special meeting 
of the same body, unless, of course, all directors are 
present, and the amendment or approval is unani- 
mously concurred in. 

Erasures should never be made to correct errors or 
omissions. The approved method is to draw a red line 
through any error that may have occurred and to 
insert the correction directly over the word or phrase 
corrected, and in this way errors may be corrected, 



CORPORATE RECORDS AND BOOKS OF ACCOUNT. 101 

and the manner of accomplishing the same is explana- 
tory of all resolutions authorizing such corrections. 

In supplying omissions from minutes, unless the 

matter omitted is too voluminous, it should be inserted 

at, or near the point of omission in the record; but 

where a resolution or other complete transaction has 

been omitted, then it is advisable to make a separate 

entry thereof, either at the bottom of the page where 

the matter omitted should have been originally re- 

! corded, or in any convenient place in the Minute Book, 

] taking care to make a note of such omission in red ink 

I in the body of the minutes where the omission oc- 

i cur red, calling special attention to the omission and 

where the matter omitted may readily be found in the 

( Minute Book. 

The Stock Ledger should show to whom the capital 
| stock was issued, and how it has been paid, and by 
| whom. This ledger can be made self -balancing by 
; establishing a Controlling Account in the General 
1 Ledger, entitled " Stock Ledger Balances/' and the bal- 
ance of which will show the standing of the Stock 
J Ledger without drawing off the individual accounts, 
the net balance of which should always be in agree- 
ment with that of the controlling account. 

It is the custom in most corporations for the secre- 
tary, treasurer or some confidential employe to keep 
a Private Ledger, provided with a lock in which are 



102 COKPOKATE EECOEDS AND BOOKS OF ACCOUNT. 

kept the accounts which it is desired shall not be 
accessible to the regular employes. These are usually 
Capital Stock, Profit and Loss, Loans and Investments, 
Personal Drawing Accounts, Salaries, and any special 
Accounts of a Confidential Nature. A Controlling Ac- 
count is then opened in the General Ledger entitled, 
"Private Ledger,' ' to which the amount of the net 
debit or credit balance of these accounts is posted in 
one item at the close of each month. This provides 
the amount necessary to complete the General Trial 
Balance, and determine whether errors have been 
made in any of the other accounts, besides furnishing 
complete protection against the forcing of balances. 

In some companies, the controlling account in the 
General Ledger is dispensed with, the list of Balances 
drawn off by bookkeepers at close of the month being 
handed to a person keeping the Private Ledger, to 
which he then adds his Net Balance, and determines 
whether or not the general books are correct. 

In keeping the Stock Certificate Book of a corpora- 
tion, care should be taken to avoid real or apparent 
over-issue of stock. This may be accomplished by 
insisting upon a proper surrender and cancellation of 
all outstanding certificates at the time of a transfer, 
by observing and complying with the usual Blank 
Forms provided in every properly worded Stock Cer- 
tificate Book, and by making proper entries of all pay- 



EXAMINATION OF BOOKS AND RECORDS. 103 

ments and transfers of stock this important branch of 
a corporation's accounting may be easily handled. 



Examina- ^ e i nves ting pnblic are now almost 
tion of Books universally demanding an Independent 
and Rec- Investigation and Eeport On the Condi- 
tion and Operative Eesults of a going 
business before seriously considering or taking any 
favorable action thereabout. 

Particularly is this so where financiers are directly 
or indirectly concerned. 

The cautious business man also demands such in- 
formation, and the seller, or party desiring financial 
assistance, is usually ready and willing to furnish such 
a report where his business is prosperous, or even 
solvent, and presents a reasonable business oppor- 
tunity. 

The great public, or quasi public corporations, pub- 
lish annually a report of this character for the benefit 
of their stockholders. 

The compilation and furnishing of this important 
information is often entrusted to audit companies, 
whose equipment for the preparation and supplying 
of such reports is a force of accountants. 

But the varying conditions and vitally important 



104 EXAMINATION OF BOOKS AND BECOEDS. 

questions which are necessarily met in the compila- 
tion of such information brings the most important 
part of this service — viz., suggestions which will assist 
the client in accomplishing the results desired — out- 
side and beyond the scope and qualifications of the 
accountant. All these features are so closely allied 
to the work of the corporation lawyer, who is experi- 
enced in the science of organization and the conduct 
of transactions of this character, that a combination 
of the two undertakings necessarily proves of great 
advantage to the client. Hence, the larger corpora- 
tions are now almost universally examined under the 
supervision of legal counsel. 

In making an examination of corporate books and 
records, the Minute Book should invariably furnish 
evidence of the authority for all large transactions 
outside the regular course of business; and recourse is 
necessarily had to this book as a basis for an intelli- 
gent examination of the corporation's transactions. 
Besides, it is frequently advisable and necessary to 
determine whether the corporation is exceeding its 
authority and transacting business outside the scope of 
its Charter, and reference for this purpose is neces- 
sarily had to the Charter or Certificate of Incorpora- 
tion itself. 

Important contracts may necessarily have to be con- 
strued in order to ascertain their real import. Then, 






EXAMINATION OF BOOKS AND RECORDS. 105 



there may be other legal objections to the manner of 
issuing and payment of stock which would suggest 
themselves only to one versed in the law, and which, 
if discovered, might change the entire aspect of af- 
fairs. Therefore, a proper investigation of all these 
matters should invariably be made in advance of the 
Audit, whenever it is desirable to have an Earnings 
Statement to interest outside capital, or for reorgan- 
ization purposes. 

The orderly course of an independent examination 
of corporate books and records is to first examine the 
Articles or Certificate of Incorporation. This will 
show the date of organization, the purposes for which 
the company was organized, the amount of authorized 
capital stock, and who is liable for its payment. 

The Minutes of the Stockholders' and Directors' 
Meetings should then be taken up. This record will 
show the manner of incorporating, the consideration 
for which stock has been issued, how the original 
assets were acquired, authority for all extraordinary 
expenditures, the remuneration of officers, the au- 
thority for all dividends paid, and the warrant for the 
making of important and unusual contracts that may 
be entered into outside the general course of busi- 
ness. 

The Stock Certificate Book and Transfer Journal 
are then examined and checked against the Stock 



106 EXAMINATION OF BOOKS AND EECOKDS. 

Ledger to determine tlie amount of tlie capital stock 
outstanding, and the owners thereof, as well as to 
guard against any over-issue of stock. 

The Trial Balances of the initial and terminating 
dates of the Audit contemplated are next examined 
and verified with the Books of Account. When the Bal- 
ance Sheets of either or both dates are given they 
should be carefully examined, particular attention be- 
ing given to the closing entries. 

In all examinations, the verification of the Cash 
Accounts is of controlling importance. While the 
investigation may not be conducted with the special 
object of detecting fraud or shortages, all necessary 
precautions are to be taken to guard against the pos- 
sibility of such irregularities being passed over. 

The count of Cash on Hand is taken at the inception 
of the Audit, and a detailed list made of all Cash, Cash 
Tickets, Vouchers and Checks, Money Orders, etc, on 
hand. A Certified Statement from the Bank should 
then be obtained. After this is done, the Bank State- 
ment and Canceled Checks are examined, and recon- 
ciliation made with the Bank Balance as shown by the 
company's Cash Book. 

In cases where the date of the examination is sub- 
sequent to the closing date of the audit, all entries, 
footings, and bank deposits must be verified for the 
intervening period. The cash items are then worked 



EXAMINATION" OF BOOKS AND BECOKDS. 107 

back by adding to the balance the disbursements, and 
deducting the receipts, which should give the correct 
balance as at closing date of audit. 

The footings of the Cash Book, general and sub- 
sidiary, for the entire period are checked. The dis- 
bursements are verified by the Vouchers supporting 
payments both as to payees and amounts. On the 
receipts side, the cash sales are checked from the 
records, and all discounts and allowances verified. The 
remittances are checked against the Ledger accounts, 
and the total receipts of each day against the bank 
deposits. 

The footing of all books of original entry must be 
checked and postings to General Ledger verified. 

If the General Ledger contains controlling accounts 
with subsidiary ledgers, these must be in perfect 
agreement. Where differences are found to exist they 
must be located and corrected. If no controlling ac- 
counts are kept, they must be constructed, and the 
balances of subsidiary ledgers verified in the aggre- 
gate. 

All cash items and column footings must be checked 
from General Ledger into Cash Book and afterward 
reviewed to see that all this class of items are cleared 
on the receipt side of the Cash Book. 

The postings from all other books of original entry 
are checked into the General Ledger. Footings of all 



108 EXAMINATION OF BOOKS AND KECOBDS. 

accounts in the General Ledger, open and closed, mnst 
be checked for the entire period and balances verified. 

Sales Books are footed and charges verified by com- 
parison with Original Orders and Shipping Receipts. 
Returns and Allowances are compared with Customers ' 
Correspondence, Entries in Eeturn Goods Journal and 
Stock-Keeper's Records. 

Journal entries are verified by supporting Vouchers, 
which must all show proper signatures of approval 
and authorization. 

Voucher Record is verified by "comparison with 
Original Invoices. All Unpaid Vouchers are listed, the 
balance showing the amount outstanding, which should 
be in agreement with Accounts Payable in General 
Ledger. 

Pay Rolls must be verified as to extensions and foot- 
ings, and be signed by some person in authority. 

Analyses are made of Profits and Loss and such 
Capital and Expense accounts as may be deemed neces- 
sary to show the results of operations of business. 
Adjusting Journal entries are made for such errors and 
omissions as have been developed in the course of the 
examination. 

In the verification and valuation of Assets and Lia- 
bilities, the Title Deeds to all real estate should be 
examined and compared with book value of property, 



EXAMINATION OF BOOKS AND RECORDS. 109 

as well as verification with amount actually paid. 
Proper charge for any depreciation should be made. 

The Plant and Machinery Account should be verified 
by actual examination and comparison with Original 
Invoices. Care should be taken to see that no items 
which should properly be classed as Eepairs and Main- 
tenance are charged to Additions and Betterments. 

Depreciation may be charged off at close of each 
fiscal period, the percentage being such as to finally 
reduce the cost of the plant to its residual value at the 
date when it is estimated it will have to be replaced. 
Or, another method is, to provide for the depreciation 
of a plant by crediting out of the net profits for the 
year — a certain fixed percentage of the cost of the 
plant and machinery to an account called "Beserve 
for Depreciation." This maintains, at all times, a 
charge on the Ledger equal to the actual cost, and is 
believed by many to be a better plan than charging, 
each year an arbitrary amount on account of depre- 
ciation. It would be possible to ascertain the exact 
cost of the plant by going back over the books for the 
period and ascertaining how much had been charged 
each year; but by keeping this account in the manner 
last suggested, the actual cost is known and the depre- 
ciation is provided for. 

Patents, Franchises, Leaseholds, etc., are subject to 
such annual depreciation; and the conservative plan 



110 EXAMINATION OF BOOKS AND RECORDS. 

is to charge off a sufficient amount each year, so as to 
extinguish their value at the time of expiration of 
such rights. 

Inventories should be signed by the parties taking 
them, and verified by the accountant as to extensions 
and footings. Prices must be cost or market, which- 
ever lowest. Groods on Consignment must be stated 
separately. All Bonds, Stocks and other securities 
must be verified by actual examination and valued at 
cost or market, whichever lowest. 

Accounts Receivable must be examined and Delin- 
quent Accounts listed. A reserve for these must be 
created in the Liabilities, and set up on the Balance 
Sheet. 

Notes Eeceivable On Hand are checked with Note 
Register and verified by actual examination. Notes 
Discounted, but not matured, are verified by Certifi- 
cate with Itemized List from Bank, for which a Con- 
tingent Liability is set up on Balance Sheet. 

Notes Payable are checked against Note Register, 
and if deemed necessary, verified by communication 
with holders. Notes Paid are verified by examination 
of Cancelled Notes. Notes Payable, unmatured, on 
which the company are indorsers, must be set up as a 
Contingent Liability. 

Reserves for discounts and all unexpired charges 
and unmatured obligations must be provided. 



EXAMINATION OF BOOKS AND RECORDS. Ill 

Adjusting Journal entries must be made to set back 
in surplus such bad debts or other charges as properly 
belong to periods previous to the one under review. 

Following is a list of exhibits and schedules which 
should be prepared in order to furnish a <com- 
prehensive report to stockholders or prospective in- 
vestors : 

EXHIBITS. 

"A" Comparative General Balance Sheet, showing 
Assets and Liabilities with Increase or Decrease for 
period. 

"B" Comparative statement of Income, and Profit 
and Loss Accounts, showing percentage of various 
expenses to net sales. 

SCHEDULES. 

No. 1. Eeconciliation of Bank and Cash Book 
Balances. 

No. 2. Accounts Eeceivable — City Customers. 

No. 3. Accounts Eeceivable — Country Customers. 

No. 4. Accounts Eeceivable — Sundry. 

No. 5. Accounts Eeceivable in Suspense. 

No. 6. Bills Eeceivable. 

No. 7. Accounts Payable — Purchase Ledger. 

No. 8. Accounts Payable — Sundry. 

No. 9. Bills Payable. 

No. 10. Comparative Monthly and Yearly Sales, 
with percentage of Increase or Decrease. 



112 EXAMINATION OF BOOKS AND RECORDS. 

No. 11. Comparative Statement by months, of 
General Expenses for Period. 

No. 12. Stockholders of Eecord. 

Further detailed statements may be furnished to 
accomplish the purpose desired, at the same time 
certain schedules referred to may be omitted within 
the limits of a complete audit. 

One of the important prerogatives of a stockholder 
in a corporation is his right to examine the books 
and records of the corporation in which he is a stock- 
holder, and this he may do by himself, or counsel, at 
any and all reasonable times and for all legitimate 
purposes. 

To enable him to avail himself of this privilege, 
the law will compel the officers of a corporation to 
permit such examination and award damages for its 
denial. 

The extent to which this examination may go is 
limited by the circumstances of the particular case, 
depending upon the nature and extent of the business, 
as well as its condition. 



REORGANIZATION AND CONSOLIDATION 

OF ENTERPRISES 

i 



Frank's "Science op Organization" etc. 



CHAPTER IV. 

REORGANIZATION AND CONSOLIDATION OF ENTERPRISES. 

Reobganization — Possible Advantages Thebefbom. 

Consolidation of Entebpbises. 

Stock-Jobbing. 

_ The title selected for this important 

Reorgani- 
zation— Pos- subject pre-supposes the existence of 

sibie Advan- two necessary conditions : First, that 

tages There- ^ e ] 311s i ness ^ as k een organized, either 

from. 

as a corporation or otherwise; and, 
second, that for some reason it is deemed necessary 
or advisable to change its status — that is, the manner 
of doing business, if not its very foundation and con- 
ditions. The manifold advantages of a corporate 
existence, as compared with the unincorporated, and 
the mode of accomplishing this object have already 
I been discussed; and the opportunity to illustrate one 
; of the chief advantages to be derived from the cor- 
porate idea, as compared with the unincorporated 
existence, is here presented. 

Under a preceding head many of the common causes 
for reorganization have been given, and in discussing 
the various practical questions arising in the course 

(115) 



116 BEOBGANIZATIOET POSSIBLE ADVANTAGES. 

of the organization and conduct of business corpora- 
tions, the advantages and methods of accomplishing 
this result have necessarily been suggested. At the 
same time a separate discussion of the subject of 
reorganization and its possible advantages to the estab- 
lished business, as well as to its owners, is necessary 
in order that many of the principles and advantages 
discussed may be illustrated and applied. 

A business venture which has failed to attain suc- 
cess may often be reorganized in such a way as to give 
it the vitality it requires, and the lack of which has 
been the cause of its failure. For instance, a business 
which has struggled along under a faulty organization 
in the first instance, may be the subject of successful 
reorganization. This faulty organization may be due 
to a multitude of causes, such as a failure to provide 
sufficient capital, or a practical way to acquire it; 
unfavorable location, either of the business itself, or 
an unfavorable State for the creation of the corpora- 
tion ; or some legal defect in the incorporation itself. 

In any and all of these cases the opportunity for 
success and rehabilitation is limited only by the cir- 
cumstances of the particular case, and the skill, under- 
standing and effort of the reorganizer. 

It is only where the business itself is a commercial 
disaster, or impossible of practical exploitation, that 
failure is certain; and when this fact is ascertainable 



REORGANIZATION POSSIBLE ADVANTAGES. 117 

or patent from an honest and scientific examination, 
it is then, of course, wise to abandon the undertaking 
altogether. 

The class of existing and going concerns which are 
a subject for reorganization, and where the greatest 
benefit and profit may be derived therefrom, are: 
First, the established concerns which are making 
abnormal returns on the capital employed; second, 
where it is the desire of those interested in the per- 
' manency and continued success of the business to 
i show their appreciation of the services of certain em- 
1 ployes, such as department heads, and to afford them 
recognition in the business itself. They will be dis- 
cussed in their order. 

What is meant by 6 ' abnormal returns from the capi- 
tal employed" is the accumulation of net profits 
annually beyond the recognized earning power of 
money; that is, what would be a fair rate of interest 
j if the amount employed in the business was invested, 
and similar security was given for the repayment of 
' the principal and interest. If the profits of a busi- 
ness in reality average in excess of this amount, some 
| action should be taken, either to reorganize the busi- 
ness so as to increase the stock holdings of the owners 
of the business, or if the business conditions will per- 
mit, increase the capital stock and thereby arrange 



118 REORGANIZATION — POSSIBLE ADVANTAGES. 

to bring the earning capacity and the relative hold- 
ings of the members into harmony. 

It is the universal experience of all that the sale 
of unlisted stocks can hardly be made above par; 
and if the stock has an earning power greater than 
the legal rate of interest it is in reality worth above 
par. 

The second class has to do with the questions of 
value and also that of management. Many going con- 
cerns have been placed in the hands of department 
managers by allowing them to have a great or small 
stock interest; and this has been found very satisfac- 
tory to all concerned, in the majority of cases. 

By properly re-valuing the busines that has been 
established, this object can be accomplished with com- 
paratively little, if any, financial sacrifice by the own- 
ers. For, invariably, the ordinary employe will exert 
a greater amount of effort, and manifest a different 
kind and degree of interest in a business in which he 
has a financial interest; and in consequence, the busi- 
ness will produce greater results, and the earning 
capacity and value of the stock will be proportion- 
ately increased. 

The following case will show many of the advan- 
tages, as well as the errors, that may occur in the 
reorganization of a business, and at the same time 



KEORGANIZATION POSSIBLE ADVANTAGES. 119 

serve as an illustration of many of the principles an- 
nounced : 

A and B were the originators of a manufacturing 
business which they had established and located in 
a suburban town. The business grew from a mere 
shop until it became an important factor in their line 
of trade. Finally they decided to " incorporate the 
business" and to that end formed a corporation — The 
A & B Company — and capitalized it for $200,000. 
Upon taking the inventory of the assets (the first ever 
made) it was found that a conservative estimate of the 
value, which included the factory site of ten acres of 
valuable land, was in the neighborhood of $180,000; 
besides, the bills and accounts receivable and cash on 
hand amounted to about $100,000 additional. Inas- 
much as A, B and C (B's son-in-law) would own all 
of the stock of the corporation to be formed, they 
considered it immaterial that the value placed upon 
the assets so greatly exceeded the capitalization, and 
transferred the property to the new corporation in 
exchange for its capital stock. 

In about three years A died and it became neces- 
sary in the administration of his estate to sell his 
stock in the A & B Company. The corporate books 
showed an average net earning for the three years 
of about 9% on the capitalization and tangible assets 
aggregating about $290,000. But notwithstanding this 



120 BEOKGANIZATION — POSSIBLE ADVANTAGES. 

favorable showing, it required diligent effort under 
the circumstances to find a purchaser for all of A's 
stock at par. D, a banker, was the purchaser, and he 
bought A's stock as an investment. 

The entire capital stock of the A & B Company 
was now owned by B, C, and D, the banker. B was 
getting along in years and desired to retire from active 
business life. C was an "office man" and not familiar 
with the manufacturing details of the business, and, 
as before stated, D was otherwise engaged and had 
no experience in or desire to become actively identi- 
fied with the manufacturing end. Finally it was de- 
cided to give three of the old employes an oppor- 
tunity to become financially interested in the business 
and to make them officers of the corporation as well. 

Upon due consideration it was now found advisable 
to reorganize the corporation and adjust the values 
and property rights of those already interested in 
order that the new members might be admitted and 
place the business in a permanent and practical form 
for future operations. 

The new corporation was capitalized at $350,000, 
and the plant, tangible assets and good will of the A 
& B Company were transferred to it in exchange for 
$315,000 of its stock. The three employes named 
were then sold outright $2,000 each of the new stock 
at par and given a contract whereby they would re- 



REORGANIZATION POSSIBLE ADVANTAGES. 121 

ceive an increase in salary amounting to $8,000 each, 
to be accumulated inside of a given period should they 
remain in the company's employ during that time, 
and to have stock issued to them annually in lieu of 
money for such yearly increase. 

The former factory site was then sold for $40,000 
cash and a new location with twenty-five acres of land 
was obtained as a bonus from a town (more favorably 
located) where such a manufacturing industry was de- 
sired. The plant was modernized and enlarged with 
the proceeds of the sale of the former factory site and 
the business was then reorganized upon a more mod- 
ern practical basis. 

As a result of this reorganization, B had $140,000 
of stock in the new corporation; C $25,000; D $150,000, 
and the three employes had $2,000 each issued to them. 
This left $29,000 of unissued stock in the treasury, 
$24,000 of which would be transferred to the employes 
named as an increase of salary and to create a per- 
sonal interest among those charged with the actual 
operation of the plant. 

At the expiration of some two years the entire stock 
of this new corporation was purchased by a syndicate 
of capitalists for the purpose of turning it over to a 
11 trust" in that line at 25% above the par value. The 
inventory that was then made and the earning state- 
ment for the period showed that the net profits of 



122 REORGANIZATION POSSIBLE ADVANTAGES, 

the business were about 11^4% on the increased capi- 
talization, as against 9% on the old, and this with the 
same business and practically the same management. 

Another illustration presenting a different phase 
of the question involved is where two separate and 
competing corporations (which for convenience will 
be designated as A Company and B Company) de- 
cided to join forces and interests under one head. To 
accomplish this purpose A Company changed its name 
to include that of the B Company and increased its 
capital stock so as to permit the purchasing of the 
business of B Company with such increased stock. 
The various stock and financial complications and 
entanglements of both corporations were of such a 
nature that the new consolidation, when accomplished, 
presented an object lesson of many of the most trouble- 
some conditions to be met with in corporate affairs. 

The working capital proved to be insufficient and 
the increased stock remaining in the treasury was 
offered for sale. Many prospective purchasers were 
found, but upon investigation into the complicated 
conditions of the company's organization and affairs 
they all declined to purchase the stock in the treasury. 
Finally (and as a last resort), the stock was offered 
to the customers and employes of the surviving cor- 
poration and much of it was sold on "easy payments" 
or on installments, with the result that after strug- 



REOKGANIZATION POSSIBLE ADVANTAGES. 123 

gling along for less than a year a complete reorganiza- 
tion was found necessary and undertaken. 

The conditions that confronted the reorganizers 
may be included in the following general statements, 
viz: faulty organization of A Company and inflated 
valuation of assets, both at the inception of the two 
undertakings and at the time of taking over B Com- 
pany's property by A Company; stock hypothecated 
as collateral for individual loans of stockholders; 
dividends had been declared which impaired the capi- 
tal ; the corporate records had not been properly kept 
and the by-laws had never been adjusted to meet con- 
ditions existing after the consolidation; much of the 
increased stock had not been paid for and no means 
could be found of enforcing such payments ; the stock 
of the company was scattered to the "four winds" 
and much of it could not be obtained for reorganiza- 
tion purposes; a large list of creditors were insisting 
upon payments of their claims; a "blanket mortgage" 
had been given the bank to secure it for current finan- 
cial accommodations, etc. In consequence, failure was 
inevitable, and what in reality was a profitable and 
promising industry became a fit subject for a court of 
bankruptcy, where the same was sold in bulk, and 
thereafter became successfully reorganized by eliminat- 
ing practically all of the stockholders of both A and B 
Companies, which meant a total loss to them. 



124 CONSOLIDATION OF ENTERPRISES. 

Innumerable examples could be given similar in re- 
sult if not in conditions to those here referred to, but 
due consideration for the size of this volume will not 
permit further illustration Besides, the important 
underlying general principles are all that can be given 
or illustrated in a science which has to deal with all 
the varied circumstances and conditions of business 
life. 



consoiida- ^ n 0UT modern system of promoting 
tion of En- and business-financing, little attention 
terprises. j g gi ven t the question of consolidation 
of corporations as such. Nearly all of the States have 
enabling statutes providing for the consolidation of 
corporations of the same kind and engaged in the same 
general business — carried on in the same vicinity. It 
is usual to limit such consolidations as here stated, 
and also to further restrict them in the number of com- 
panies that may avail themselves of such privileges. 
This has been done to prevent the formation and crea- 
tion of " trusts and combines,'' in restraint of trade. 
These safeguards and restrictions have simply sug- 
gested a more practical and advantageous method of 
accomplishing the same or similar result, namely, to 
organize a new and independent corporation, and to 
then purchase outright such rival industries as may 



CONSOLIDATION OF ENTERPRISES. 125 

be desired; and in many instances, stocks and bonds 
of the new corporation, or the proceeds of their sale, 
have been used in payment for those rival plants. 

Then, again, it is not unusual for one rival cor- 
poration to increase its capital stock, and to then pur- 
chase outright the plant of a rival, and to issue in pay- 
ment therefor, the stock of the purchasing company, 
or to use the proceeds of its sale for that purpose. 

These plans, and others similar, have almost en- 
tirely superseded the actual consolidation of corpora- 
tions under statutory authority and restrictions; and 
any extended reference to the plan would but involve 
a discussion of the litigation which has resulted from 
its adoption. 

Eailroad companies are an exception in the use of 
the actual consolidation method, for the reason that 
more liberal laws are uniformly enacted for their 
special benefit, and this on account of their public 
character and necessities; and the tendency of the 
various States in this regard is to further enlarge 
such powers and encourage them to consolidate. 

Notwithstanding the public sentiment which un- 
questionably still exists against consolidation (or 
reorganization for this purpose), the legitimate advan- 
tages that are derived therefrom are now apparent 
to those who are at all familiar with such matters, 
and it deserves consideration from an economic point 



126 CONSOLIDATION OF ENTEKPRISES. 

of view, as well as from a sentimental or personal 
standpoint. 

It has been aptly said that an ideal social condi- 
tion would be that in which, in every department of 
industry, there should be one great corporation work- 
ing with its possible economies and compelled to give 
to the public the full benefit of those economies, and to 
accept in return a reasonable rate of interest upon the 
actual capital employed. 

While it will be universally conceded that such a 
condition does not yet exist, it must, however, be ad- 
mitted that the public, employer, and employe have 
almost universally derived substantial advantages 
from the majority of consolidations which have here- 
tofore taken place. And it may safely be expected 
that, with a more intimate acquaintance and under- 
standing of these questions by the public, and a rea- 
sonable State or National control over great industrial 
combinations, a practical solution of the " trust 
abuses' ' will be at hand; i. e., welcome centralization, 
but repress total monopoly — extortion. 

It is doubtful when and where the advantage of 
monopoly in business was first discovered; certainly 
few successful enterprises have been found where the 
element is, or has ever been wholly absent. It will be 
found to exist in some form or other, either in the 
shape of patents, trademarks, trade names, or pecul- 



CONSOLIDATION OF ENTERPRISES. 127 

iar characteristics and features adopted by the manu- 
facturer of an article of trade which distinguishes it 
from all others of a similar nature. These and other 
species of monopoly are, and have been, the common 
objects of all successful enterprises. 

One might as well undertake to compete with a rival 
up-to-date manufacturing concern without the aid of 
any of the modern machinery or facilities commonly 
employed as to wholly disregard the advantages that 
may be derived from centralization of effort and capi- 
tal. 

The statutes of the State must be strictly followed 
in effecting a consolidation of corporations; and in 
case the plan of reorganization or re-incorporating 
is adopted, what has been said in relation to the sub- 
ject elsewhere will apply as well here, and therefore 
need not be repeated. 

There is always present the important questions of 
plans of procedure, etc., which have been referred to 
throughout, and they should engage the particular 
attention of a competent, experienced corporation 
lawyer. 

It is frequently important that a corporation should 
be legally and formally dissolved upon the sale of all 
its assets to a rival corporation, or to one formed for 
the purpose of consolidation. 

A corporation can only be dissolved by expiration of 



128 CONSOLIDATION OF ENTERPRISES. 

a time limit for corporate existence granted in the 
charter (and in some States several years thereafter) 
by decree of a court of competent jurisdiction; by 
voluntary act of the corporation itself in accordance 
with forms prescribed by the laws of the State of its 
creation, and where the charter is granted directly 
by the Legislature of a State, it may be repealed and 
annuled by such Legislature. 

It is sometimes prescribed by statutes (as in Illi- 
nois) that the failure to file certain reports with the 
Secretary of State will work a forfeiture of the char- 
ter, or that the Secretary of State may arbitrarily 
cancel such charter upon the failure of such corpora- 
tion to comply with the acts in question, but this is 
not lawful, unless in accordance with the Constitution 
and express wording, and reservation of such power 
in the statutes; without which the Secretary of State 
has no such power. 

Unless some one of the above general conditions 
has been complied with, the corporation lives on, re- 
gardless of all other questions, and the subscribers to 
the capital stock, or stockholders, may be called upon 
at any time for any latent and unintended liability 
that may exist or arise. 

The statutes of the various States prescribe the 
mode of voluntary dissolution of corporations, and 
these must be strictly followed. They usually require 
the consent of the stockholders, or a large majority of 



STOCK-JOBBING. 129 

them (usually two-thirds), to such dissolution, and 
that the question shall be voted upon formally by 
such stockholders at a meeting regularly and formally 
called in accordance with such statutes. 



The most conspicuous abuse of the 

Stock Job- , -i o i i • j 

corporate plan 01 conducting enter- 

bing. 

prises is the creation of trusts and 
monopolies for the purpose of extortion and enforced 
subjugation. Immediately following this modern 
crime against society, is the more subtle and illusory 
perversion of the opportunities conferred, viz., "stock- 
jobbing." 

The motives that prompt the commission of the 
offense first above referred to might be properly de- 
nominated greed and a reckless disregard for the 
rights and welfare of others; while the impulse that 
suggests and contributes to the achievement of the 
latter is obviously dishonesty. 

What may and may not constitute stock-jobbing is 
a relative question, but the meaning of the term as 
here alluded to is the issuing of stock for fictitious 
or grossly inflated values, and the creation of corpora- 
tions for ulterior purposes, such as the collection of 
funds from the sale of stock for the ostensible pur- 



130 STOCK-JOBEING. 

pose of promoting an enterprise, while in fact the 
money tlras acquired is to be used for the personal 
benefit of the organizers themselves. 

Another and less flagrant class of transactions 
which fall within the definition of the term here con- 
sidered are those enterprises which are capitalized 
for an exorbitant and unreasonable amount for 
various reasons, among them being the desire to offer 
the stock of such a company at a discount for the pur- 
pose of inducing the inexperienced to buy it, and to 
gratify the visionary individual who may be behind 
the enterprise. 

In order to illustrate the possibilities and effects of 
issuing stocks upon fictitious and inflated values of 
property transferred to the corporation at the time of 
its creation, one has only to investigate the inside his- 
tory of many (if not a large majority) of our large 
industrial enterprises formed within the past few 
years, and, in fact, many of our railroads are reported 
to be capitalized "in the air," so to speak. In 1905 
the capital stock of all the railroads of the United 
States amounted to $6,741,956,825, and the total lia- 
bilities, except current accounts and sinking funds, 
amounted to $14,765,178,704.* Should these figures be 
applied to an individual or single business enterprise 
the conditions would not be regarded with favor by 

•Figures taken from Report for 1905, U. S. Bureau of Statistics. 



STOCK-JOBBING. 131 

financiers, for while the cost or value of properties 
are not available (except an estimate of some 
$12,000,000,000), it is assumed that the total amount 
of capitalization reflects a liberal valuation on the 
tangible assets at least of these properties, and if this 
is a correct premise, then the chief assets are the 
franchises and intangible rights which depend upon 
continued operation for their value. In brief, the rail- 
roads are financed upon their probable earning capa- 
city, rather than upon substance, and while this might 
reasonably be regarded as legitimate and proper 
financing in this class of enterprises, if the same 
principles were applied to individual industries, they 
would be regarded as stock-jobbing. 

In the recent combinations of industrial enterprises 
many instances may be found where the capital stock 
represents a generous valuation of the properties con- 
solidated, while the bonded indebtedness of these con- 
I cerns is equal to, and in many cases greater, than the 
capitalization; hence if both bonds and stocks have 
been sold and are outstanding and being held by in- 
vestors, this form of property represents a large per- 
centage of our present floating securities. 

The foregoing is but illustrative of the abuses of the 
corporate system perpetrated in the higher realm of 
financiering for the purpose of drawing capital; and 
the ethical responsibility for the ultimate repayment 



132 STOCK-JOBBING. 

of the money thus secured rests upon those who have 
inaugurated the plans adopted, as well as upon those 
who have knowingly assisted in carrying such plans 
into effect. 

Where financial assistance is sought in every-day 
business affairs it is the exception rather than the 
rule that enterprises are able to acquire such assist- 
ance except upon establishing their financial merit, 
and this must be based upon material wealth. The 
experienced financier would not regard with favor the 
application of an enterprise that was involved in a 
bond issue to the extent of its responsibility, when 
viewed from the material standpoint. In other words, 
the principles adopted by "high financiers," who are 
responsible for floating the securities which have been 
issued by railroads and industrial enterprises within 
the past few years, would not be the basis upon which 
financial assistance could regularly be obtained. While 
a more liberal rule necessarily obtains in the capital- 
ization of enterprises than that adopted by banks and 
financiers generally in extending commercial credit, 
still the basis for a sane valuation is in principle the 
same. 

It is not the purpose here to condemn or defend the 
transactions which now constitute, in a measure at 
least, the material for a general history of modern 
American finance, but to illustrate what appears to be 



STOCK-JOBBING. 133 

erroneous and prejudicial theories for the financial 
foundation of a business enterprise. 

We must assume that the vast majority of the busi- 
ness of the future will be transacted by and through 
the corporate system, and it would seem that in the 
light of recent events no greater service could be ren- 
dered to those who are engaged in the "game of busi- 
ness," than to impress them with the responsibilities 
and ultimate consequences of their methods. While it 
is conceded that the moralists are the individuals 
most concerned with discourses on ethics and moral 
sentiment, still no vocation can wholly disregard ques- 
tions that involve its reputation as a respectable and 
honorable occupation. 

Business is now the principal occupation of society; 
it furnishes the means of livelihood, and financial as 
well as social advancement, for a great majority of 
mankind. In the process of evolution, which business 
is now and necessarily must continue passing through, 
it is imperative that those who are concerned about its 
future should take heed of certain inevitable conse- 
quences of what is recognized to be a violation of the 
law of natural right. The Socialist now sees the end 
of "class privileges and individualism" in the wake of 
our present commercialism; while the individualist 
( hopes and believes that only the ethical improvement 
of mankind will work out the destiny of this modern 
dominant force. 



134 STOCK-JOBBING. 

Social scientists tell us that the corporation is fos- 
tering, if not responsible for our oppressive trusts 
and monopolies ; that without this institution we would 
have free competition with its attending benefits. On 
the other hand, these same scientists admit that com- 
petition promotes "commercial cannibalism"; there- 
fore, it may be seen that any attack upon a system of 
accomplishing a given end cannot be effective, and 
that after all, the motives of the individuals rather 
than the system under which they operate are essen- 
tially of controlling importance. 

It is folly to lay the blame of unjust or oppressive 
conduct upon corporations; while they are, according 
to the predominant "fiction theory", a legal entity 
they are without moral or mental qualities — conscience, 
feeling or moral responsibility — and should not be 
chargeable with the acts, conduct or motives of their 
stockholders, directors or officers who control their 
policies and their every act ; and no system of laws for 
the national or state control of corporations will make 
the individuals composing them, fair, equitable or just. 

The subject of over-capitalization has already been 
discussed; in the succeeding chapter further illustra- 
tions are given of this and other abuses of corporate 
privileges which are so intimately connected with the 
subject in hand. 



PROMOTION OF ENTERPRISES 



Frank's "Science op Organization" etc. 



CHAPTER V. 

PROMOTION OP ENTERPRISES. 

Pbomotebs. 

Promotion Contracts. 

Good Will — Trademarks and Trade Names. 

Patents and Their Commercial Value. 

Mining Enterprises. 

According to "Webster, a promoter is 
"One who sets on foot and takes the 
preliminary steps in a scheme for the organization of 
a corporation, a joint stock company, or the like." 
Assuming this definition to be correct, there are few 
men who have not, at some time or other, acted the 
part of a promoter. At the same time, there are 
many persons who would resent being called a pro- 
moter, even of a single undertaking. 

This prejudice is due primarily to the fact that the 
nature and opportunities of the business have at- 
attracted so many visionary, irresponsible and (we 
believe we are justified in adding) dishonest persons. 
In fact, the confidence man is not a stranger to this 
field of activity. 

But it is as unjust and unwise to condemn pro- 

(137) 



138 PROMOTERS. 

moters as a class, because frequently a "Colonel Sell- 
er s" or a "confidence man" has been found among 
them, as it would be to condemn our National currency 
on account of the discovery of an occasional counter- 
feit. In both cases the spurious is more frequently 
discovered among the smaller "denominations," and 
the reason is apparent. 

Promoting, as a profession, was begun in London. 
A prominent commercial publication contained the 
following interview with one of the first of this pro- 
fession to attract attention in the field of consolidating 
industrial enterprises : 

"Months and months of the hardest kind of work is 
necessary to float these great concerns. People are 
incredulous, and it is hard to win them over. Some 
want more than the actual value of the property 
sought. It takes more than ordinary persuasion to 
convince holders of property, stocks or bonds that it 
is best for them to sell, or become a party to a proj- 
ect, whatever it may be. 

"I take hold of nothing until I am convinced that 
success is certain. I then interest the practical men 
of the different concerns to be consolidated; these 
practical men agree with me to take three-fourths of 
the stock. Next, I interest capitalists in the remaining 
one-quarter of the stock. Only those who are best 
adapted are put at the head of the institution as 



PROMOTERS. 139 

officers and directors. That insures the strictest 
economy and highest efficiency in the management of 
affairs. Then, after the company has been floated, I 
keep a sharp watch over operations. 

"I have turned down dozens of offers for my serv- 
ices in promoting new companies." 

It was an English promoter who conceived, or 
rather demonstrated, the plan of consolidating a num- 
ber of properties in a certain line of manufacture, 
without the necessity of money entering into the trans- 
action — at any rate, to any considerable extent. As 
the plan has been adopted in this country in so many 
important instances, it is deemed worthy of attention. 

The following is a quotation from an article appear- 
ing in a leading commercial magazine, published upon 
the first " exposure" of the plan: 

"A & Company were manufacturers of shoes, and 
their business showed a net earning capacity of 10% 
on the estimated value of their plant, to-wit : $1,000,- 
000; B & Company, also shoe manufacturers, showed 
a net earning capacity of 7% on the value of their 
plant, to-wit: $600,000; C & Company, also shoe 
manufacturers, showed a net earning capacity of 8% 
on the value of their plant, namely, $400,000. 

"D, the promoter, succeeded in interesting these 
three companies in the plan of consolidation, and upon 
its consummation, the properties were all turned in at 



140 PBOMOTEBS. 

the valuations named, making a total of $2,000,000, 
with the average earning capacity of 8.7% on the val- 
uation named. 

"A bond issue was created on these properties 
of $2,000,000, and the capital stock of the corpora- 
tion taking over the properties was placed at a like 
sum, namely $2,000,000. 

"One-half of this capital stock was made pre- 
ferred stock, 6% cumulative, and this issue and the 
bonds mentioned were all turned over to the various 
corporations, pro rata, in full payment for the plants, 
and the parties originally owning the plants were 
made officers and directors of the new corporation. 
This left the promoter with $1,000,000 of the common 
stock of this combined aggregation for his profit, and 
which, it is unnecessary to say, was promptly sold to 
the unsuspecting public." 

Another example, and one nearer home, further 
illustrates the resourcefulness of human ingenuity: 
A, being a large dealer in coal, discovers a series of 
mines along and dependent upon a certain railroad 
for shipping facilities. He conceives the idea of con- 
solidating, or rather buying up all of these mines and 
making them the basis of a large corporation, which 
would then be in a position to control the output of 
these properties. His first step was to get an option 
on all these industries at a price as near their reason- 



PBOMOTEES. 141 

able value as it was possible to do. In addition to this, 
he acquired options on most of the available land in 
that vicinity that was supposed to contain coal, or 
could be utilized for the purposes he had in view. 

After he had acquired these options, he went to the 
officials of the railroad company referred to, and un- 
dertook to interest them in the project — making clear 
the point that the revenue from the traffic of these 
mines would in a very short time pay for the prop- 
erties — and incidentally, that the same traffic would 
support, if not materially assist, in the construction 
of a competing railroad that would connect with 
another large system and thereby deprive them of this 
profitable traffic. While the railroad company in 
question did not, itself, take an interest in this proj- 
ect, it was by or through the assistance of the officers 
of this road that the deal was consummated and the 
options taken up, and working capital provided, with 
money raised by a bond issue upon the properties 
themselves. As a result of this transaction, $1,000,- 
000 in first mortgage bonds were floated, and $3,000,000 
of common stock was issued, largely for the intangible 
assets of this corporation, namely, the options them- 
selves, which cost A in the neighborhood of $3,000 
initial investment. 

Still another example illustrates the more daring 
and troublesome class: 



142 PKOMOTBES. 

A, B & C organize a railroad corporation for the 
ostensible purpose of constructing a line of road to 
a distant city. They have an elaborate prospectus 
prepared, showing the proposed right of way and 
trains in operation. As a temptation to the investors, 
they show the enormous gross earnings of some "com- 
peting line" and others that are National prides, and 
then offer the stock of this phantom road at a ridicu- 
lously low figure "for a limited time only; 99 and, as 
a still further generous concession, they propose to 
permit small investors to acquire a block of this stock 
on easy payments. 

Expensive and sensational advertisements are in- 
serted in the daily press, and every modern and 
effective method of reaching the wage-earner is 
adopted; with the result that enough money is col- 
lected from the inception to continue the campaign of 
exploitation and promotion. 

Now the real purpose of the scheme is put into 
action, namely, the payment of salaries to A, B & C, 
and this is continued until the enthusiasm of the 
available investors is exhausted. 

There is necessarily a certain amount of actual 
development work done to aid the scheme and to 
bolster up a plausible defense in case of interference 
upon the ground of fraud, but the "Bailroad" is ever 
in contemplation until the contributions cease, and 



PEOMOTION CONTEACTS. 143 

then the salvage of the financial wreck is passed along 
lto the hands of a receiver for distribution. 
These examples are given for the purpose of illus- 
rating the possibilities for great financial gain which 
ive attracted the speculator and unscrupulous alike 
this profession. 



Contrary to the prevailing notion, the 

Promotion 

Contracts contracts of promoters are not neces- 
sarily confined to the inception of abusi- 
less or the organization of a corporation. They may, 
and usually do, extend into the initial operation of the 
enterprise, at least to the extent of raising the neces- 
sary capital and "putting on foot" the project in 
hand, after the corporation is formed; and for this 
reason, their acts and responsibilities may cover a 
large range of conduct. 

Probably the questions causing the most contro- 
versy and litigation in this relation arise in connec- 
tion with the promoter's compensation or profit; that 
is, how he can lawfully acquire compensation for his 
services, when his employment is to "set on foot and 
take the preliminary steps," in the organization or 
reorganization of a business project. 

His compensation is often contingent upon the 



144 PROMOTION CONTRACTS. 

accomplishing of a certain end, and the difficulty usually 
encountered is to ascertain for whom he may act, and 
to whom he can look for his compensation. 

Assuming that the business with which he is em- 
ployed is to be conducted by a corporation to be 
formed, manifestly he cannot bind the corporation 
until it is in existence, and even then there is some 
difficulty encountered where the services were ren- 
dered prior to the creation of the corporation in ques- 
tion. 

Some States have statutes providing for the pay- 
ment of capital stock of corporations organized therein 
— in services. They are South Dakota, North Dakota, 
Idaho, Colorado, West Virginia, Delaware, Maine, and 
a number of other States whose laws are otherwise 
deemed unfavorable to the principles announced. 

What constitutes "services" is often a subject of 
inquiry. It has been held that a gift of stock to a 
promoter is illegal, and that the issuance of stock to 
"influential persons" for the use of their names, is 
equally so. But the issuance of stock by corporations 
created by any of the above named States for bona 
fide services actually performed, and for which the 
corporation either contracts, or accepts the benefit of 
by proper resolution, is legal. 

When the promoter is acting for parties in interest 
in an established business, where it is desired to re- 



PROMOTION CONTRACTS. 



145 



organize or enlarge the same, the safe and proper 
method is to contract with the parties to be benefited 
by such services, for a percentage of the stock which 
they receive in payment for their interest in the enter- 
prise. Then, upon the transfer of the business in 
question to the corporation when formed, the agreed 
percentage of the stock issued to the parties in interest 
for their share in the business enterprise, can 
be assigned to the promoter, and in that way obviate 
every question and fulfill every requirement. 

The relation of the promoter to the corporation is 
usually fiduciary, and in consequence, his acts and 
duties in dealing therewith are governed by the rules 
of law pertaining to that relation generally. 

For a general consideration of the subject in hand 
the rights and obligations of the parties will be classi- 
fied as follows: The duties and responsibilities of 
the promoter (a) to his client; (b) to* the subscribers 
of stock; (c) to the corporation promoted, and (d) to 
the stockholders after organization; then, the recipro- 
cal duties and obligations of (e) the client and (f) the 
corporation to the promoter. 

The duties and liabilities of the promoter to the 
client are generally based upon contract, either ex- 
press or implied, depending upon the circumstances 
of the particular case. 

Generally speaking, the promoter is held to a very 



146 PROMOTION CONTRACTS. 

high standard of conduct, as he usually occupies a re 
lation of trust and confidence ; and whenever the ques 
tion of his loyalty is involved the burden is upon the 
promoter to establish the utmost good faith and fair 
ness in all his dealings with the client. 

He may not acquire any secret advantage over his 
client by reason of his employment ; and he is in many 
respects charged with the same degree of responsi- 
bility as an attorney. 

The promoter's duties and liabilities to the sub- 
scriber of stock of the corporation frequently arise 
through representations made by him either in the 
prospectus or otherwise, before incorporating. The 
rule is well established that he is personally liable for 
any misrepresentations, and for withholding impor- 
tant information which the circumstances of the par- 
ticular case make it his duty to disclose. 

It is not moral obligations that the promoter is 
liable for; but where it is necessary for him to dis- 
close important facts to enable the subscriber of stock 
to determine whether or not he will become interested 
in the proposed corporation, failure to disclose will 
render the promoter liable to such subscribers for any 
damages resulting from his silence. In other words, 
intentional withholding of information may be equiv- 
alent to misrepresentation. 

The liability of a promoter to the corporation may, 



PROMOTION CONTRACTS. 147 

under appropriate circumstances, be governed by the 
same rules as those applicable to his relation to the 
client. If the promoter places himself in a position 
of trust to the corporation, he is charged with all the 
responsibilities of that relation generally. 

This responsibility invariably attaches where he is 
looking to the corporation (when formed) for his 
compensation, and where he is to be reimbursed for 
his expenses by it; and it has been said that the test 
of his responsibility is : Was he benefited by the incor- 
poration? In any event he is bound to exercise good 
| faith, and if he afterward acts for the corporation in 
J securing capital, either from the sale of its stock or 
otherwise, he thereby becomes its agent and will not 
be permitted to acquire any secret personal advantage 
through such employment. 

The most common source of disagreement and con- 
sequent litigation is where the promoter is personally 
interested in the property conveyed to the corporation 
1 at the time of its formation. In such a case the pro- 
; moter is obliged to see that the property conveyed is 
* fairly valued as well as fairly acquired by the corpora- 
tion — that is, he must see to it that a disinterested 
Board of Directors pass upon the value of the prop- 
erty conveyed by him, and that it also is to the inter- 
j est of the corporation to acquire such property. 

This does not mean that the promoter may not 



148 PROMOTION CONTRACTS. 

make a profit on property sold to a corporation which 
he is forming, but it does mean that he may not make 
a secret profit therefrom. It is his duty to disclose to 
his corporation that he is profiting by the transaction, 
or in any event he must not conduct himself so as to 
lead the directors to believe that he is not so doing. 

The promoter of a corporation who becomes an 
officer thereof on its formation is in consequence to be 
treated as its agent and trustee, and is accountable to 
the corporation for any secret profits which he may 
realize upon property bought for or sold to the cor- 
poration. 

In order to charge one with the responsibilities 
above referred to, it is often a question as to who is 
or is not a promoter. To constitute one a promoter 
of a corporation it must be shown that he was acting 
for and on behalf of the corporation, or that he 
assumed so to act; and that on the strength of such 
authority or assumed agency, the party complaining 
dealt with him upon such understanding. 

The duties of the promoter to the stockholders of a 
corporation after it is incorporated are usually that 
of an agent. However, the promoter may be liable 
to all, or a part of the stockholders, for a separate 
accounting to them, where his course of dealing has 
placed him in the positon of a partner at the incep- 
tion of the undertakings; that is, where he has se- 



PROMOTION CONTRACTS. 149 

cured the co-operation of all or a certain number of 
the stockholders upon the representation that they 
were to share equally with him in the profits of the 
undertaking, in such a case he is liable, of course, as a 
partner; and the right of action is based more upon 
the right of a co-partner than that of a stockholder. 

Where, however, the wrongs of the promoter are in 
the representations made alike to all, in relation to 
the corporation or its property or intentions, the right 

I of action must necessarily be maintained by the cor- 

1 poration, and not by the stockholders. 

i The reciprocal duties and liabilities of the client to 

1 the promoter are usually regulated by contract, either 
express or implied, and those of the corporation to 
the promoter depend largely upon the circumstances. 
If he is acting directly for the corporation, its respon- 
sibilities to him are to reimburse him for his services, 
and, as before stated, if the corporation was not in 
existence at the time the services were performed, if it 
afterward adopts the acts of the promoter, or accepts 
the benefits of his work, it is liable to him for the 
reasonable value thereof. 

If the statutes of the State under which the cor- 
poration is organized provide for a subsequent pay- 
ment by it of the costs and expenses of incorporating, 

I then, of course, he may recover for such expenses 
incurred in bringing the company into existence. 



150 PROMOTION CONTRACTS. 

Where a promoter acts for a corporation that is to 
be formed, his contracts are similar to those of an 
agent generally under similar circumstances; and if 
the principal (the proposed corporation) is never 
brought into existence, there is no remedy for those 
who have dealt with the promoter upon un-executed 
contracts made in that way ; but it must clearly appear 
that the promoter is acting for a corporation to be 
formed, or he will be personally liable upon such con- 
tracts. 

Of course, where money or property has been turned 
over to a trustee, or to the promoter, upon such con- 
tracts as are here referred to, a different rule applies, 
and the prospective stockholder may have appropriate 
relief in case the corporation is never formed. 

Among the important promotion contracts are those 
relating to the subscription to capital stock, as well 
as bonds or other securities, made at or before the 
complete organization of the corporation, or the tak- 
ing over of tangible property in exchange for its stock 
or bonds, and this subject is so intimately connected 
with that of underwriting and guaranteeing such is- 
sues that they will be considered here and in the in- 
verse order named. 

Underwriting stock or bonds means simply to sub- 
scribe for a certain portion or the entire issue, upon 
the agreement that payments shall be made at some 



PROMOTION CONTRACTS, 151 

future date or on installments, and at a price usually; 
below par. Such contracts are necessarily made with 
banks and other financial institutions, syndicates or 
financiers of recognized ability and standing, who are 
not only able to dispose of such securities but to pay 
for them, even if they are not sold at the time speci- 
fied in the underwriting agreement when such pay- 
ments are to be made. 

The advantages to the corporation from such a con- 
tract are many, the principal ones being the assurance 
of ready working capital at all events, the prestige of 
a well-known distributer of securities, the services of 
experienced financial agents, and a ready market. 

The underwriter of such securities has also special 
facilities for ascertaining the responsibility of the in- 
stitution issuing the securities offered, and the gen- 
eral investing public are aware of that fact and there- 
fore more readily influenced by the representations of 
such underwriters concerning the merit and value of 
the investment. 

Many issues of such securities are underwritten by 
financial institutions without the investment of any 
considerable portion of the value of the securities un- 
derwritten, as they are usually sold to the general in- 
vestor before the payments by the underwriter become 
due; and his profit is usually the difference between the 



152 PROMOTION CONTRACTS. 

price he contracts to pay for the entire issue and 
whatever may be realized from the sale to the invest- 
ing public, and this varies according to the character 
of the investment, and the probability of their ready 
sale. 

Guaranteeing stocks and bonds, as the term implies, 
insures the value and payment of the issue or portion 
thereof to the investor. Such an undertaking is 
usually to guarantee that stocks will not pay less than 
a certain specified dividend during a certain period, or 
that bonds will be paid in full at maturity. Analogous 
to this is what is termed the "trust-fund" plan, which 
is also designed for the protection of investors, or pro- 
fessedly so, but it is so little in actual legitimate use 
as not to merit discussion. 

The organizers of the corporation are all considered 
in law as its promoters and their contracts as sub- 
scribers to the capital stock of the corporation to be 
formed for any lawful purpose are binding, as being 
based upon the consideration of their mutual agree- 
ments to take such stock when the corporation is 
formed, and each subscriber will be liable to the other 
subscribers for his failure to carry out his subscrip- 
tion. In addition to his liability to the other sub- 
scribers, a further liability to the corporation itself, 
as well as to its creditors, accrues as soon as the char- 
ter or certificate of complete organization is issued 



PROMOTION CONTRACTS. 153 

by the State creating such corporation; in other words, 
as soon as the subscription is acted upon by such 
State. 

As between the subscribers to the capital stock, a 
special agreement to accept property, at a fair valua- 
tion, in payment for such stock is also legal, and the 
valuation placed thereon by the subscribers or pro- 
moters will govern; such agreement will not bind the 
corporation unless acted upon and adopted by it. 

Contracts for underwriting and guaranteeing the 
stocks or bonds of a corporation before it is formed, 
are not free from objection on account of the difficulty 
in the preparation of such contracts owing to the lack 
of a legal entity to contract with; it is usual to make 
such contracts with a trustee or party acting as such 
for and on behalf of the organizers of such proposed 
corporation or the parties who are to become inter- 
ested therein. 

To summarize, it may be said that promotion con- 
tracts or contracts that have to do with promotion of 
an enterprise are so numerous as to involve the whole 
law of contracts, and that any extended discussion of 
that subject is beyond the purpose of this volume. 

The reader is here referred to the various contracts 
given in the appendix hereto, all of which have been 
successfully used by the writer in the course of his 
professional connection with the promotion and financ- 
ing of enterprises. 



154 GOOD WILL — TRADEMARKS, TRADE NAMES. 

Goodwin. ^ n ^ le preying chapters we have 
Trade-marks chiefly referred to tangible property and 
and Trade its relation to the subjects of organiza- 
tion and reorganization of business 
enterprises. Under this, and the following head we 
will discuss intangible assets, a species of property of 
comparative recent origin, and which is largely the 
product of the business ability, devotion to principle 
and ingenuity of those creating it. 

As has been heretofore stated, the good will — gen- 
eral reputation for reliability and ability to serve — is 
frequently of greater value than the tangible assets 
belonging to an enterprise, and the law now recognizes 
it as a very respectable species of property. At the 
same time it is not permissible to arbitrarily value the 
good will of a business so as to create a fictitious asset, 
as is so frequently done. 

The subject of Trademarks and Trade Names is 
so intimately connected with that of Good Will that 
it is deemed necessary, for a practical understanding 
of their importance and use, to consider them together. 
In fact they are inseparable when considered in the 
light and for the purpose here intended. 

Trademarks are arbitrary symbols, devices or dis- 
tinguishing marks applied to a given article of manu- 
facture which are destined to appeal to the eye and 



GOOD WILL TRADEMARKS, TRADE NAMES. 155 

serve as a means of ready and certain identification 
from all other products of a similar nature; while the 
use of the Trade Name is to show the source from 
which the particular article came. Therefore the 
Trade Name, appealing as it does to the ear, is so 
intimately connected with the Good Will of the Manu- 
facture as to be its means of identification. 

The reputation and standing of a business is only 
identified and protected by and through its name and 
arbitrary marks for identification of its product, and 
the possession of either or both may enable a stranger 
to the particular enterprise to begin where another 
leaves off, and thereby profit by his past efforts. And 
here we find proof positive of the established ethical 
doctrine, viz : that honesty and fair dealing are indis- 
pensible to permanent success in business, for the most 
valuable and thoroughly established Good Will may 
perish when and as soon as the public discover any 
deterioration or lack of the qualities which have 
created it in the first instance. 

The creation of the species of property under con- 
sideration, viz: good will and trade names, as well as 
trademarks, are the result of the labor, skill and in- 
vestments of the possessor, and their protection and 
utilization as property universally receive adequate 
protection. 

The life of a trademark is perpetual, and while the 



156 GOOD WILL TRADEMARKS, TRADE NAMES. 

law protects it for the benefit of the public, the pro- 
tection of the trade name is principally for the party 
entitled to it. 

The property right in trademarks is recognized by 
common law, and has been by the courts since the 
latter part of the fifteenth century. Most of the States 
have laws for the protection of trademarks, and the 
National Government has a complete system for their 
registration. 

It is essential to the property right in a trademark 
that the party claiming it as his own should be the 
first to adopt it as such, and then to so use the mark 
as to show the intent to create a property right 
therein; and this may be done only by actual adop- 
tion and constant use by the originator or his succes- 
sors or assigns. 

The reason that the law of trademarks is designed 
chiefly for the protection of the public is to prevent 
the substitution of an inferior for a superior article, 
or of one man's goods for another's. 

For what may be, as well as for what may not be 
an appropriate trademark, is beyond the scope of this 
book, it being a subject of too great moment and im- 
portance to be treated in a general discussion of the 
subject as this is designed to be. Like the general law, 
it must necessarily receive the attention of one versed 
in the particular branch of the science, whenever the 



GOOD WILL TKADEMAKKS, TBADE NAMES. 157 

questions relating to the adoption and establishment, 
as well as the registration, of a trademark is involved. 

Generally speaking, however, geographical names 
cannot be appropriated as such trademarks, and un- 
less protected through the laws of unfair competition, 
there is no protection in the use of such geographical 
names. Neither can the name of a given commodity 
be used as a trademark, and this applies as well to 
the name of an article that is patented; for after the 
life of a patent has expired by limitation, the public 
has a right to use the name by which such patented 
article has been identified, as well as to its unre- 
stricted manufacture. The name of the producer or 
words necessarily descriptive of the article cannot be 
used as trademarks. 

To constitute a valid trademark and what may be 
adopted for such a purpose, the name or symbol must 
be exclusive — that is, it must be first adopted and used 
by the party claiming it for marking a certain article, 
grade or quality of his product; and he may not in- 
fringe on the marks of others so as to create confu- 
sion and deception. Generally speaking, any symbol, 
word or mark which others have not an equal right 
to use may be adopted as a trademark. 

Kegistration of trademarks is not a means of cre- 
ating them, but it serves to establish title, by proof of 
adoption. 



158 GOOD WILL TRADEMARKS, TRADE NAMES. 

The value of trademarks to a business is now almost 
universally understood and acknowledged; their use 
tends to fix in the minds of all who observe them 
the object advertised, regardless of the wording of the 
advertisement or whether it is ever read or not ; hence 
the advertisement is not a loss in any event. 

The Good Will and Trade Name are a species of 
property that may be valued and sold, and the pur- 
chaser protected in their enjoyment the same as any 
other property; the same is true with trademarks. 

The assignment of trademarks may be made to the 
same extent as other property, but with one impor- 
tant exception — the trademark must (with few excep- 
tions) accompany and pass to the party who purchases 
the good will of the business; any general assignment 
of the good will, will carry with it the trademarks in 
use, without any special reference to such trademarks 
in the assignment, and this is equally true of the trade 
name in use. 

While it is, of course, impossible to fix the value of 
the good will of a business with mathematical precis- 
ion and accuracy, still such value may be arrived at 
with sufficient certainty for all practical purposes. 
The common rule adopted for valuing the good will is, 
to first ascertain the net earning capacity of the busi- 
ness for a given period, usually for a sufficient number 
of years to reach the general average of such earning 



GOOD WILL TRADEMARKS, TRADE NAMES. 159 

capacity, then to divide the amount thus obtained by 
the number of years over which the estimate extends, 
and this will constitute the general average profits upon 
which the value of the good will depends. Then as 
to the value, it must necessarily vary according to the 
circumstances of the particular case. 

A common practice in determining and fixing the 
value of the good will (where common stock is to 
be issued therefor) has heretofore been to place the 
amount at a sum upon which the annual net earnings 
would pay a dividend, equal, at least, to the legal 
rate of interest prevailing in the State where the trans- 
action occurs. As an example, suppose the average 
annual net earnings to be fifty thousand dollars 
($50,000); this would be five percent (5%) on one 
million dollars ($1,000,000) and that sum would con- 
stitute the value of the good will. But this is purely 
arbitrary and without foundation in reason, as the 
good will differs so widely in character from actual 
money or money's worth that to make it a basis of 
value upon its earning power is to go farther and place 
its intrinsic worth equal to money as well. Besides, 
the good will of a business has no value aside from its 
immediate connection with the business itself, and 
upon the winding up of the enterprise, by law or upon 
liquidation, the property vanishes. 



160 PATENTS AND THEIR COMMERCIAL VALUE. 

As before intimated, no inflexible rule will apply in 
fixing the value of the good will of a business; its age, 
standing and earning capacity are elements of its value 
only. 

The trademarks are integral parts of the business 
as a unit, and their individual value is not important, 
except as elements in the valuation of the good will 
and their relative value and importance to the future 
of the enterprise. 

Here, as with patents, it is difficult to value "future 
prospects and possibilities' ' and this must depend upon 
the particular circumstances of the case under consid- 
eration; for if the business has been organized and 
established with skill and experience behind it, its fu- 
ture prospects and possibilities may be of far greater 
value than its present good will, and in this, at least, 
intangible property differs from that of tangible, viz: 
in that of their valuation. 



patents It is to inventive genius that we owe 

and Their much of the wonderful material prog- 

commerciai ress f the world during the last few 

Value# hundred years. Starting from the 

printing press, which has brought universal education 

and enlightenment, making civil and religious liberty 



PATENTS AND THEIR COMMERCIAL VALUE. 161 

possible, a succession of astonishing inventions has 
carried civilization forward by leaps and bounds to 
this, the "Machine Age." The weaving inventions 
have clothed the humblest laborer in fabrics that once 
delighted kings. Steam and electricity have made all 
nations neighbors, and the minor special inventions 
and discoveries have filled the houses of the "common 
people' ' with luxuries which but a few generations ago 
were beyond the dreams of princes. 

Eecognizing the value to society of the wonderful 
fruits of invention and investigation, governments 
have sought to stimulate the efforts of inventors by 

, the enactment of laws that enable them to reap a suita- 
ble reward for their services to humanity. 

Although many an inventor has slept on his rights, 
and never realized enough to cover the expense of 
suing out a patent on his invention, yet many of the 
great fortunes amassed in this country have had 
patents for their basis. We readily recall the Pull- 
man palace car; the telephone and numberless other 

; electric inventions; the Westinghouse air brake; the 

' mowing and reaping machines; the bicycle and auto> 
mobile devices, and a thousand more. Many a great 
manufacturing business has been built up on some 
simple invention or improvement which cheapened the 

I productions of some article of common use. In fact, 
the most fruitful field for the rank and file of the 



162 PATENTS AND THEIR COMMERCIAL VALUE. 

army of inventors has been among the simpler, almost 
trifling, inventions, and improvements on other in- 
ventions. 

The inventors of a shoe-button, a safety-pin, a hook- 
and-eye, the " roaming toy," a dime savings bank, etc., 
made quick and easy fortunes. 

Notwithstanding the great number of patents 
issued, it seems as if the field for new ones grows 
wider the more the patents increase. Each new de- 
velopment seems to create new wants and the need of 
new devices. Inventions known as "novelties," and 
improvements on articles in every day use are con- 
stantly in demand. 

Contrary to the prevailing notion among many lay- 
men, the fact that an article has been "patented" is 
no conclusive assurance that an exclusive right "to 
manufacture and use" such an article is thereby 
secured to the owner. "While it is true that the issu- 
ing of letters patent on an invention is prima facie 
evidence of its patentability, still it is not conclusive 
evidence. 

In investigating the questions in hand, the statutory 
requisites to patentability first require consideration. 
In order that they may be understood, the law on the 
subject will be here given, namely: 

"Any person who has invented or discovered any 
new and useful art, machine, manufacture, or compo- 






PATENTS AND THEIR COMMERCIAL VALUE. 163 

sition of matter, or any new and useful improvements 
thereof, not known or used by others in this country 
before his invention or discovery thereof, and not 
patented or described in any printed publication in 
this or any foreign country before his invention or 
discovery thereof, for more than two years prior to 
his application, and not in public use or on sale in this 
country for more than two years prior to his appli- 
cation, unless the same is proved to have been aban- 
doned may, upon payment of the fees required by 
law, and other due proceedings had, obtain a patent 
therefor." 

It is apparent that utility is one of the chief consid- 
erations upon which the Government grants its ex- 
clusive right to use and produce an invention ; and this 
important requisite to patentability largely determines 
its commercial worth as well. As already appears, 
the invention must be "new and useful," as well as 
useful, but manifestly the fact that the invention is 
new would not render it of any value in the business 
world unless it was useful as well; therefore, in ar- 
riving at the commercial value of a patented invention 
utility is the first feature to consider. 

The essential features that determine the commer- 
cial value of a patented invention, and the order in 
which they may be investigated, are : First, the utility, 
i. e., the usefulness — intrinsic novelty and the probable 



164 PATENTS AND THEIE COMMERCIAL VALUE. 

demand; second, the cost of production, L e., the man- 
ufacturing possibilities and means of producing the 
invention ; third, the legal novelty — patentability, i. e., 
the construction and validity of the specifications and 
claims, as well as the protection afforded thereby ; and, 
fourth, the title of the patentee or alleged owner of the 
invention. 

As to the utility and manufacturing merits and cost 
of an article, these are questions for the experienced 
business man and skilled mechanic, and they are of 
first importance in determining the commercial value 
of an invention. 

Perhaps the simplest method of determining the 
legal novelty, i. e., patentability of an invention, and 
the one primarily useful, is to see if it contains either 
or both of the following elements : First, if the article 
produced is as good in quality, and (as a result of the 
invention) such article can be produced at a cheaper 
rate than similar articles already on the market; or, 
if it is better in quality and can be produced at the 
same rate as other articles, or both combined; and 

Second, as to the device or method of production, if the 
object in view or manner of obtaining the same be new, 
and the device or product be useful, then it may be 
considered a patentable invention and subject to such 
protection. 

The law protects simplicity and economy of con- 



PATENTS AND THEIR COMMERCIAL. VALUE. 165 

struction, and the fact that the invention does not 
appear to be a great one will not prevent its being con- 
sidered as a new and useful invention. The substitu- 
tion of different kinds of power for the accomplish- 
ment of a common end is not a subject of patent ; the 
mere assemblying of a number of old devices or forms 
for the accomplishment of a well-known result is not 
patentable; the omission of an element from a device 
so that the same result may be obtained by a less num- 
ber of operations or devices is patentable; the com- 
bination of known elements for the production of a 
new result is patentable; the accomplishing of a 
greater result or utility from the same quality of ma- 
terial may be patentable, etc. 

The fact that a resourceful patent attorney may 
have obtained letters patent on a device that did 
not in reality contain patentable requisites may be 
disclosed for the first time upon the trial of a suit for 
infringement. An illustration of this fact is found in 
a recent case decided by the Supreme Court of the 
United States, involving the validity of patents issued 
upon "sectional bookcases," where two rival manufact- 
urers sought to establish their respective rights to the 
1 exclusive use of these now popular office and house- 
hold articles, with the result that the Supreme Court 
held the patents to be void for lack of patentability. 

Another practical subject for consideration relates 



166 PATENTS AND THEIR COMMERCIAL VALUE. 

to questions of conveyance. The titles to patented 
inventions may be investigated in a similar maimer 
to those of real estate, for the reason that the Govern- 
ment has a complete recording system, wherein all 
conveyances, licenses, etc., are (or should be) re- 
corded ; and an abstract of title may be had, by appli 
cation to the Commissioner of Patents, and the pay- 
ment of the necessary charges therefor, which depends 
entirely upon the number of transfers that have been 
recorded, and such an abstract of title is necessary to 
determine and show the title to any patented inven- 
tion. 

The subject of transfer of letters patent may be di- 
vided into three classes : First, the assignment of the 
whole or an undivided interest in an invention before 
letters patent have been issued;* second, an assign- 
ment of the whole, or an undivided interest, in an 
invention after letters patent have been issued,! and 
third, a license or other conveyance, not amounting to 
an absolute sale of the whole or any part of the inven- 
tion itself. 

An invention is susceptible of being conveyed prior 
to the issuing of letters patent thereon ; and as between 
the parties to such a contract the same is binding, 
whether the patent ever issued or not; and should the 
patent issue, such contract has the same force and 

* See form in Appendix, page 227 t See form in Appendix, pages 229-231. 



PATENTS AND THEIR COMMERCIAL, VALUE. 167 

effect as an assignment after issue. In fact, it is not 
unusual for such assignment to contain authority and 
instruction to the Commissioner of Patents to issue 
the patent to the assignee. 

As to the conveyance of a patented invention after 
letters patent have issued, this is comparatively a 
simple matter, requiring only that the person who is 
the owner of such patented inventions shall execute a 
formal conveyance of the same. The only important 
observation that need be made on the subject of actual 
conveyance is as to the propriety of an inventor or 
owner of letters patent conveying an undivided inter- 
est (i. e., a one-half or one-third interest) in the 
same; for such an act may destroy the value of the 
monopoly on the invention. It has been demonstrated 
and decided that the owner of an undivided interest 
in an invention has all the rights of the exclusive 
owner so far as to manufacture, vend and sell the de- 
vice in question; and besides, it is essential that in 
prosecuting or defending an infringement suit the 
owners of the entire interest must join in order to 
maintain or defend such a suit; and this may be im- 
possible after the conveyance of a part has been 
made. 

In relation to contracts which purport to be licenses 
or "shop rights' ' for the exclusive or territorial right 
to manufacture or sell a patented invention, the word- 



168 PATENTS AND THEIR COMMERCIAL VALUE. 

ing of such contracts may amount to a transfer of the 
entire interest of the inventor, instead of a license or 
contract, unless care is exercised in the preparation of 
such an instrument. In general, any wording that 
amounts to the sole and exclusive right and monopoly 
of manufacturing or selling the device is a transfer of 
the entire interest therein. 

A simple test of the question as to whether a license 
in reality amounts to a conveyance is if the grant 
vests the entire interest in the invention or transfers 
the monopoly therein, it is an assignment ; on the other 
hand, if it leaves in the assignor any part of the exclu- 
sive monopoly granted under the patent, then the con- 
veyance is a license. It is always a question of con- 
struction of the language used, and it is necessary that 
great care should be exercised in the wording of the 
instrument intended as a license. 

The soliciting of patents is essentially a specialty 
in the practice of Patent Law, and the commercial 
value of a patent depends (in a marked degree) upon 
the care, skill and ablity of its solicitor. 

Much criticism has been made upon our patent laws 
on account of the opportunity which is accorded 
thereby to deprive the public of the benefit of new and 
useful inventions during the lifetime of the patent. 
An investigation of the patent records at Washington 
discloses the fact that many important improvements 



PATENTS AND THEIR COMMERCIAL VALUE. 169 

on existing devices now in common use have been 
made, and that they have been purchased by leading 
manufacturers in the line of business to which the 
invention pertains; that instead of "bringing out" 
such inventions, and giving the public the benefit of 
their improvements, they are " shelved' ' so to speak. 

The explanation for this evidently lies in the fact 
that one of the most expensive departments of every 
manufacturer is the "experimental department " and 
the great expense attached to the making of constant 
changes in a given product, besides the "confusion" 
which would be produced thereby. At the same time 
these "business reasons" do not satisfy or interest the 
public, who have granted the patent protection to the 
inventor as a reward bestowed for his invention and 
a stimulus to future efforts. 

One of the manifold benefits to be derived by adopt- 
ing the corporate system inures to the inventor when, 
as is frequently the case, he is without sufficient means 
to develop and market his invention. As has been 
hereinbefore intimated, he may not assign an un- 
divided interest in his invention without risking the 
monopoly or exclusive right to manufacture, vend and 
sell the same, and this may occur as well by a co- 
partnership arrangement for its control as by separate 
assignment; hence the almost universal adoption of 



170 PATENTS AND THEIE COMMEKOIAL VALUE. 

the corporate plan under all such and similar circum- 
stances. 

An inventor may form a corporation under the laws 
of any State, and assign his invention to such cor- 
poration without endangering the rights secured to 
him under the letters patent from the Federal Govern- 
ment. As in every other case, it behooves him to pro- 
tect his rights in the corporation by retaining control 
or a sufficient interest in the same to insure protec- 
tion. The corporation becomes the sole owner of the 
invention by such an assignment as above suggested, 
and through its elasticity for adaption to particular 
needs, any legal purpose may be accomplished, either 
through the making of a contract with the inventor 
or the issuance of its capital stock for the reasonable 
fair commercial value of the invention. And while 
the courts have held that there is no presumption of 
value to a patented invention, yet it may be safely 
said that such a value may be placed upon the inven- 
tion as its particular merits and the extent of the pro- 
tection afforded by the patent grant will warrant, and 
this may be determined by the rules referred to herein, 
and others which will present themselves in every case, 
and the reasonable value of such invention to the cor- 
po ration, if fairly arrived at, will govern. 

It has been the almost universal experience of those 
attempting to deal with inventors (as a class) that 



MINING ENTEBPBISES. 171 

they greatly exaggerate the real commercial value of 
their inventions; and this undoubtedly is due to the 
application and devotion which has been bestowed to 
create the invention in the first instance, or the lack 
of experience in marketing or the development of new 
improvements in existing devices. 



Mining The vast amount of capital neces- 
Enterprises. sarily involved in acquiring, equipping, 
developing and conducting mining enterprises makes 
this one of the most favorable objects for corporate 
organization ; and while many of the principles hereto- 
fore announced as relating to this form of existence 
generally apply with equal force to mining enterprises, 
still there are important questions which should be 
considered separately, as peculiarly applicable to such 
undertakings. 

That there is such a legal and practical distinction 
between mining corporations and those organized for 
commercial and other undertakings has been recog- 
nized by courts of review. In considering the nature 
of mining as distinguished from commercial corpora- 
tions, or corporations created for the conduct of com- 
mercial enterprises generally one court said: 

4 1 Mining corporations are zui generis. They are 



172 MINING ENTERPRISES. 

organized and carried on upon principles wholly dif- 
ferent from banking, railroad, insurance and ordinary 
commercial corporations having a subscribed capital 
stock." 

And to some degree, at least, the rules relating to 
organizing the different kinds of mining corporations 
differ, particularly in the mode of financing. The 
plans that would be applicable to a corporation formed 
for the mining of precious metals would not ordinarily 
be appropriate for a corporation created for the oper- 
ation of coal properties, or the development of a marble 
or stone industry. 

The reason for this lies largely in the character of 
the undertaking. In the case first named its specula- 
tive character is to be taken into consideration, and 
the plans of financing applicable to mining enterprises 
of a speculative character differ widely from those 
commonly adopted for the promotion of those which 
are less so. 

Specialization in the professions and business alike 
is now universal, and this fact is emphasized in the 
subject under consideration. An operator in the 
copper, lead or zinc field would not, as a rule, be 
equipped to operate a coal mine, and vice versa. And 
a miner of the precious metals could not adopt the 
same methods used by him, and which are acquired by 



MINING ENTERPRISES. 173 

experience and training in that special department of 
mining, to either of the other classes named. 

The geologist and mining engineer also specialize, 
as do the manufacturers and dealers in mining equip- 
ment and supplies ; and the advantages of specializing 
in this field, as in all others, are now well recognized 
by all familiar with the subject. The owner of a valu- 
able mining property which had met with disaster 
would now no more employ a mining engineer who 
was not a specialist in that particular class of min- 
ing than the same individual would call a general 
medical practitioner to perform a major surgical 
operation upon himself. 

In the discussion of the subject in hand no attempt 
will be made to detail the history of that class of min- 
ing corporations which have been organized for ques- 
tionable or fraudulent purposes — such as the acquir- 
ing of capital to pay salaries, and to provide a means 
for their promoters to get hold of stock certificates in 
order that they might get money from the inex- 
perienced investors, the chief concern of those organiz- 
ing such companies being to successfully avoid 
criminal prosecution for their transactions. At the 
same time no extended discussion will be attempted 
of the innumerable plans and devices which have been 
heretofore adopted to finance and promote speculative 
mining enterprises, particularly those devoted exclu- 



174 MINING ENTEKPEISES. 

sively to the mining of precious metals. It will be 
sufficient for the purposes of this volume to state that 
the manner of organization of such a corporation 
must be governed by the circumstances, and the laws 
of the State where the particular corporation is 
created, and to refer to some of the practical and 
distinguishing features generally. 

The important questions of procedure which arise 
for consideration in the organization of and which are 
peculiar in a mining corporation are first the cap- 
italization (and this involves the necessities of the in- 
corporators and questions of finance) ; the next is 
undoubtedly the purpose of the corporation which is 
to conduct such an enterprise; and the third is the 
domicile, or the selection of a State for its creation. 

It is customary (and undoubtedly the custom will 
continue) to capitalize corporations that are organized 
to mine precious metals at an arbitrary amount, with- 
out regard to the value of the property which it is to 
own and operate; then to convey the mining claims 
to the corporation for all, or a large proportion of the 
capital stock, and to then donate back into the treas- 
ury all, or so much of the capital stock as is to be 
sold for development purposes; and this might be con- 
sidered the established custom, and one which is free 
from legal objections. Particularly is this true when 
such mining corporations are created under the laws 



MINING ENTERPEISES. 175 

of a State where the mining of precious metals is the 
principal industry, for in all such States special laws 
have been enacted to encourage the development of the 
State's mining resources, and the speculative nature 
of the undertaking is there recognized and the value 
placed upon the mining claims or other properties by 
directors of domestic corporations are conclusive. 

In regard to the less speculative mining enterprises, 
such as coal, copper, lead, zinc and stone, their cap- 
italization should receive more conservative treatment, 
and they may be considered as more nearly approach- 
ing the commercial corporation in regard to their 
formation. An example of "high finance " in the con- 
solidation of coal properties has been already shown, 
and the general principles therein exemplified will 
illustrate the possibilities of creating questionable 
securities by grossly-inflated valuation of the proper- 
ties consolidated. It may be conceded that the latitude 
permissible in the valuation of properties of this 
character is greater than in the ordinary industrial 
undertaking, and that the "good-faith" rule, herein- 
before referred to, is all that is required; that is, the 
exercise of good faith and the absence of fraud in the 
valuation of such mining properties will constitute a 
safe rule, both as to liability of directors or upon the 
capital stock issued in payment for such properties. 

It is of practical importance that the capitalization 



176 MINING ENTERPRISES. 

of a mining corporation should be fixed with due 
regard for its ultimate object. If no further prop- 
erties are to be acquired than the one in contemplation 
at the time of organization, the amount of capitali- 
zation should be governed by the value of the mineral 
rights or land, and the necessary working capital ; and 
with a proper foundation the capital stock of such a 
corporation can be increased to meet any future expan- 
sion that may be deemed advantageous. But where a 
corporation is to be formed to acquire two or more 
developed mines, or with that ultimate object in view, 
the question is more difficult of solution, and no gen- 
eral rule can be announced that would meet the re- 
quirements of any but particular cases, or be of prac- 
tical value in so doing ; and it might be added that this 
is one of the numerous conditions which confronts the 
organizers of large corporations generally, and noth- 
ing but an intimate knowledge of the subject, and 
actual experience in its application, can qualify such 
organizers to properly meet and dispose of many of the 
important practical questions which invariably arise. 
The creation of bonds which are secured by the prop- 
erty of the mining corporation, is frequently desirable, 
for the purpose of raising working capital as well as 
for the protection of those interested in the enterprise; 
and the use of such bonds have frequently been the 
means by which a worthy and enterprising operator 



MINING ENTERPRISES. 



177 



has ultimately acquired the ownership of valuable 
mining property. 

The sale of such bonds among financial institutions 
is often difficult, for the reason that the property upon 
which they are secured usually lies at a distance, and 
the value of such property is based largely upon its 
continued operation and development ; and unless this 
is assured, such bonds are not considered as desirable 
security, and experience has often demonstrated that 
when such bonds are sold in the open market at all, 
it has been at a great sacrifice. However, with proper 
management and with the property in a developed 
stage, the issuance of such bonds is not only advan- 
tageous but their sale to private investors or local 
financiers may be effected much more readily than 
stock, and without unreasonable sacrifice. 

The purposes or objects of mining corporations are 
of importance for all the reasons heretofore given 
under another and appropriate heading, as well as for 
the following, which are in a measure peculiar to min- 
ing corporations : As before stated, it is a well-settled 
principle of law in every jurisdiction that a corpora- 
tion cannot exceed the powers conferred upon it by 
its charter, and such powers are derived by and 
through the wording of the purposes or objects set 
forth in the application for such charter. 

Where it is the intention of the incorporators to do 



178 MINING ENTEEPEISES. 

more than actually operate a mine, such as to conduct 
a general store, to erect and maintain dwelling-houses 
for employes, to construct and operate electric or other 
power plants, tramways, etc., in connection with the 
mining enterprise, it is, of course, necessary that these 
powers should be conferred upon the corporation 
through its charter. 

In many States there are limitations placed upon 
corporations owning real estate, and in such States 
care must be exercised not to violate such laws ; for it 
has been held that even though the charter is granted 
for purposes that are prohibited by the general act 
under which such corporations are created, the unlaw- 
ful acts may be shown to defeat the corporation when- 
ever it attempts to enforce such illegal objects. In 
legal phraseology, corporations may, under such cir- 
cumstances, be "attacked collaterally. ' ' 

The following may be considered as an approved 
form for the wording of the objects or purposes of a 
mining corporation organized under the laws of the 
State of Illinois for the purpose of mining coal : 

"To mine, buy, sell and deal in coal and its by-prod- 
ucts; to acquire by purchase, lease or other lawful 
means, coal lands and properties necessary and con- 
venient for the construction, successful operation and 
maintenance of coal mines and their equipment; and to 
do and perform any and all lawful things incidental 



MINING ENTERPRISES. 175* 

and necessary to the successful operation of coa? 
mines, and the production and sale of coal." 

It might be appropriate to add that the implied 
powers incident to corporate existence need not be 
stated in the charter. In many States the charter 
enumerates, in detail, such implied powers, while such 
powers are left to implication in other States, and in 
the last named States the wording of the purposes or 
objects may be limited simply to the principal objects 
I contemplated. 

In relation to the domicile or State selected for the 
creation of a mining corporation, the observations 
hereinbefore made on the subject are applicable alike 
to such corporations; and except for the advantages 
to be derived by a trial in the Federal courts of pos- 
sible litigation for personal injuries (as well as other 
cases) such corporations should be created under the 
laws of the State where their physical operations are to 
be conducted. The laws of such States are invariably 
j more favorable to such corporations, and particularly 
j to their financing, and the actual executive head of the 
] enterprise, or business office, may be, and usually is at 
a distance from the property operated, and often in 
another State. 

The law relating to the transfer of real estate gen- 
erally is equally applicable to the construction of con- 
veyances and contracts relating to mining rights; but 



180 MINING ENTERPRISES. 

there are some practical and legal questions which will 
be briefly alluded to, as being particularly important 
in the organization and promotion of mining enter- 
prises. 

It is now well-settled law in the United States that 
the owner of the surface of land is also the owner of 
everything beneath it to the center of the earth. A 
few States have express statutes declaring that all 
minerals underlying lands owned by citizens of foreign 
countries belong to the State; and the rights of the 
Government to minerals underlying public lands and 
those rights derived through what is known as the 
"Apex law" are the important exceptions to the gen- 
eral rule above stated. 

In the wording of conveyances, the significance of 
the word " minerals " is important, as it has been held 
that this word is sufficiently comprehensive to include 
not only gold, silver, iron, coal, etc. (when in workable 
quantities) but it also includes oil, natural gas and 
stone. Hence, the use of such phrases as "mineral 
substances," "coal and other minerals," "lead, zinc 
and other minerals," etc., may have important signifi- 
cance in such conveyancing. 

Another important feature is the right of surface 
owners with relation to the minerals named. Of 
course, as regards coal, iron and other base metals, the 
minerals are co-extensive with the surface. In the case 
of gas and oil this is not so. An operator with only 



MINING ENTERPRISES. 181 

sufficient surface to accommodate his plant may reduce 
to possession as much oil or natural gas as though he 
owned any given amount of surface; then the Apex 
law, so generally recognized in all mining states, give 
similar rights to the owners of land or mining claims, 
i. e. to follow all veins, loads and ledges wheresoever 
they may lead and to appropriate all minerals to be 
derived therefrom throughout their entire depth, from 
the top or apex, where such apex lies inside of the 
lines or boundary of such land or claims. 

It is not uncommon for extensive mining develop- 
ment to be done under a royalty lease, and without 
regard to consequences of adverse decision by courts, 
in possible litigation resulting from future disagree- 
ment regarding its terms ; and without taking into con- 
sideration the future possible necessities of the min- 
ing corporation. It is equally as common a practice 
to include in such royalty leases a provision of for- 
feiture in case of a breach by the operator, whereby 
all improvements and development work (which in- 
cludes the shaft, etc.) will revert to the lessor, or 
owner of the land. The wisdom of purchasing in fee 
at least a sufficient amount of land upon which the 
mine is to be sunk and the plant located, cannot be 
i doubted; and the advantages thereby acquired should 
be apparent to all interested in such an undertaking. 
The principal investment of a mining corporation is 
I made in sinking its shaft and the construction of its 



182 MINING ENTEEPRISES. 

mine generally, and without the precaution above sug- 
gested an almost total loss can occur through some 
informality or defect made in the royalty lease under 
which such development has been made. 

It is customary to take an option on the tract of 
coal or other mineral lands in advance of their pur- 
chase, in order that prospecting may be done to ascer- 
tain the extent and quality of the mineral before pay- 
ing for the same. In the Appendix hereto will be 
found an approved form of option agreement for this 
purpose.* This form supposes payment in cash for 
mineral lands or minerals. A form for the same pur- 
pose, where the payments are to be made in cash, and 
stock of the corporation to be formed for the develop- 
ment of the property, is also there inserted.f The plan 
last suggested has a double advantage to the operator, 
one in reducing the cash investment in the minerals 
or mining rights, and the other in the securing of 
local interest and the co-operation of their owners. 

Frequently it is deemed advisable or necessary to 
deposit a deed or place the title papers to mineral 
lands in escrow pending the prospecting which it is 
deemed necessary to do to establish the value and 
extent of the mineral rights so conveyed, or for va- 
rious other reasons or purposes which may arise. In 
such event the following form (with such modifications 

* Tage 233. 

f Page 238. [This form or plan with modifications to suit conditions, 
has been used by tlio author in a number of important cases where the 
principal capital required was to be obtained from outside sources then 
beyond the reach of his client.] 



MINING ENTERPRISES. 183 

as the particular circumstances may require) will 
serve as a guide and suggestion for the purpose 
named : 

Escrow Agreement. 
(To be written on envelope or other enclosure con- 
taining deed, lease or contract.) 

The enclosed deed (lease or contract) of 

is hereby placed in the possession and keeping of 

, in escrow, upon the follow- 
ing terms and conditions, viz : 

If shall place or cause to be placed 

to the credit of , in the 

Bank of on or before 191.—, 

the sum of Dollars, then and in that 

event, the said is hereby authorized, 

empowered and directed to deliver the enclosed deed 

(lease or contract) to , or to whom 

he may in writing order. In case the said 

shall not so place, or cause to be placed to the credit 

of said in said Bank, the said sum 

of Dollars, on or before 

191...., then in that event the said is 

hereby authorized and directed to return the enclosed 

deed (lease or contract) to the said or 

to whomsoever he may designate in writing. 

[Seal.] 

[Seal.] 

, 191 



184 MINING ENTERPRISES. 

The preparation of conveyances, and all mining con- 
tracts (as well as the doing of all things pertaining 
to the formation, and bringing into legal existence of 
mining corporations, where the rights of the individ- 
uals are to be conserved and protected) must neces- 
sarily receive the careful attention of those versed in 
the law, as well as the financial and practical needs of 
such undertakings generally ; and incidentally it might 
be said that there are no places in business affairs 
where the application of the well-known maxims, 
"what is worth doing at all, is worth doing well, and 
all good work must be paid for" and "a man who 
offers his services at a specially low rate generally 
puts them at their true value" — are exemplified as in 
the performance of services by the legal profession 
of this character. They may properly be termed ' ' con- 
structive services," as the results of such work are 
productive not only of substantial benefits to the em- 
ployer but to the investing public and community at 
large as well, and the evolution in business methods 
to the present high state of perfection is largely due 
to their efforts. 






APPENDIX 



Frank's "Science of Organization" etc. 



TABLE OF CONTENTS 
APPENDIX 

PAGE 

Explanation 189 

General contract between incorporators to form a corporation. . 197 
Special contract between incorporators to organize a corpora- 
tion for the purpose of purchasing and enlarging a busi- 
ness . . * 201 

Reorganization certificate, 206 

Appraisal of property , 208 

Resolution ratifying commissioners' acts, etc 209 

Receipt by commissioners for advance payments pending or- 
ganization, with assignment thereof 211-213 

Installment certificate and assignment thereof 214-216 

General By-Laws 217 

Assignment of invention before letters patent issue 227 

Assignment of undivided interest in patent 229 

Assignment of entire interest in patent 231 

Coal option with deferred payments 238 

Coal option with stock and cash plan 238 

Stockholders' proxy 243 

Rules governing the listing of stocks and bonds on the Chi- 
cago Stock Exchange 245 

Synopsis of the corporation laws of New Jersey, Delaware, 

Maine and South Dakota 247 

Act regulating the admission of foreign corporations to do 

business in Illinois. ., r>.«o«*««*o«*««oe«*. = «... 260 

Table showing earnings on stocks and bonds ..«. •••«•••• 265 

(187) 






EXPLANATION 

There is of necessity a discrepancy between what 
is recorded and what is to be desired in any work that 
undertakes to generalize on a subject so extensive as 
that of business organization; and here as in the law 
the exact question "at issue' ' is rarely discussed or 
settled by precedent. But the general rules and modes 
of procedure herein announced, together with the il- 
lustrations that follow, will be sufficient to enable the 
resourceful individual to avail himself of, not only 
the plans discussed, but suggest others that will meet 
his particular needs. 

Throughout the text reference has been made, to 
various illustrations given in this department of the 
book, and when considered in conjunction with the 
text on the subjects referred to, they may be ade- 
quately explained to enable the reader to appreciate 
their application; but there are other uses and pur- 
poses to which such illustrations may be adapted, that 
require further comment which has been reserved for 
this particular discussion. 

There are many general forms published and now 
available to all that simply illustrate arbitrary methods 
of conducting corporate affairs; but such forms, are 
as a rule, simply the author's personal methods of 

(189) 



190 



APPENDIX. 



accomplishing a given purpose, which might be done 
in a great variety of ways, and which would be equally 
effective and proper; hence no attempt will be made 
to encumber this volume with miscellaneous forms, 
but only those which may be of special value as 
practical illustrations. 

It is rarely ever safe for the layman to undertake 
the use of forms in any event, for the most important 
questions (which would only occur to one versed in 
the law) may thereby be overlooked; a careful ex- 
amination however, of forms and illustrations in con- 
nection with discussions on a given subject of this 
character, is of value, principally to enable the reader 
to arrive at a clear and proper understanding of what 
may be done in a given case or under other conditions 
that may arise. 

The illustrations that follow are what may be termed 
unusual, inasmuch as they are not of the stereotyped 
variety so commonly published as "forms". 

General Contract Between Incorporators to Form 
a Corporation. This illustrates an aproved method 
of taking the initial step in forming a corporation 
under the laws of any state. With such a contract 
the incorporators have settled all preliminary questions 
and their relative rights and obligations, both to one 
another and to the corporation itself; besides it places 
in the hands of the attorney who is to organize the cor- 
poration, all the data and authority which he will re- 
quire, at least preliminary to the application for 
charter. 

The use of this contract, while not essential or 



APPENDIX. 191 

necessary, (particularly in the smaller organizations) 
cannot but be of advantage where a large number 
of incorporators are to participate, or where it is 
desirable that the parties should bind themselves in 
advance of actual subscription to the capital stock. 

Should special plans of financing be desirable, that 
fact would materially change the phraseology in regard 
to the character of stock, etc., and necessarily require 
the attention of legal counsel; but for the usual and 
ordinary case, this illustration may readily be adapted 
and prove a well devised plan to facilitate the organi- 
zation of business corporations generally. 

Special Contract Between Incorporators for the 
Purpose of Purchasing and Enlarging a Business. 
This illustration is susceptible to almost unlimited 
adaptation. The elasticity of the corporate form, 
as hereinbefore explained, has suggested — and the same 
ivill continue to further develop — means of adjusting 
the rights of owners of property and investors, which 
enable both to accomplish almost any desired result. 

The illustration here shows a case where the owner 
of a manufacturing plant, and individuals with capital 
join forces in a corporation which is to own and 
operate the business formerly owned by such in- 
dividual. By this method it will be seen that the 
owner of the supposed business is materially benefited 
by the transaction, and the individuals furnishing the 
capital may be adequately protected in their invest- 
ments. 

It will be readily suggested to the most casual reader 
that this plan may also be utilized in effecting the sale 



192 APPENDIX. 

of a business either immediately or after the corpora- 
tion is organized and under operation. Such sale 
can be made by the transfer of stock of the former 
owner of the plant ; and under ordinary circumstances, 
his stock (received for the plant) should be of greater 
value than the plant in his hands before organization. 
Besides, a sale should be more readily effected after 
organization than before. 

Here, we also see a practical illustration of the op- 
portunity to capitalize and reduce to a substantial 
property right, the good-will and trade name of the 
business, all of which would be of little or no money 
value unless protected in this way. 

What has already been said on the subject of cor- 
porate financing, will enable the reader to apply the 
various suggestions offered to meet the requirements 
of any condition arising in the practical use of this 
illustration, where a going business is to be purchased 
or taken over by a corporation when formed for that 
purpose. 

Reorganization Certificate. The use of this in- 
strument is referred to in the text as applicable in a 
reorganization of an existing corporation where 
reasons exist for the same. The signing of such a 
certificate in duplicate and the surrender of the stock 
certificates held by the stockholder, places in the hands 
of the trustee selected, ample authority to proceed 
with such reorganization along the lines agreed upon 
and set forth in the reorganization certificate, and 
such terms may be whatever the particular circum- 



APPENDIX. 193 

stances demand or the individuals interested may 
impose. 

This method has proven to be advantageous (from 
the reorganizer's standpoint at least) in a number 
of important cases. One of the chief obstacles in the 
way of the reorganization of a corporation, where a 
large number of stockholders exist, is the fact that a 
few minority stockholders may greatly hinder or 
prevent the accomplishment of such an object and 
involve the corporation in expensive litigation should 
an attempt be made by the officers, or those in control 
to force a reorganization; in adopting the method sug- 
gested, the reorganization may be placed in the hands 
of a disinterested person, and neither the stockholders 
nor the corporation become involved in the attempt; 
and besides, this method enables the reorganizers to 
negotiate and treat with each stockholder separately, 
and to prevent undue advantage being taken by any 
signer of this certificate after the same is executed. 

Here, as in the illustration last referred to, many 
additional terms and conditions may be added to meet 
ithe requirements of any case, such as the issuance of 
(preferred or other special stock or bonds, and the 
relinquishing of the rights of the holders of stock for 
jsuch special stock or bonds, or the making of a trust 
jcompany the trustee for the stockholders or corpora- 
tion as the case may be; and the depositing of stock 
with such trust company in exchange for special 
Trustee Certificates or receipts is a common practice, 
iparticularly among large corporations, where a sale 
of the entire assets to another corporation in exchange 

i 



194 APPENDIX. 

for its stock is to be effected, or a change in the 
financial plans are desired. 

"Where the owner of a business desires to ultimately 
dispose of his interest therein, or in case the re- 
organizers of a business desire to provide for the 
payment of the purchase money of the tangible assets 
of a business reorganized, without encumbering the 
same by a mortgage to secure a bond issue, it has 
often proven advantageous within the experience of 
the author to provide for special stock, such as is 
referred to in the text, as being preferred as to 
dividends and assets, or to create still another species, 
i. e. a special obligation in the nature of stock, whereby 
the corporation obligates itself to pay a certain 
dividend each year on such shares (out of the profits) 
and not to exceed a certain specified dividend on the 
other stock of the corporation, then any surplus re- 
maining after the payment of such dividends must be 
paid to the holders of such special certificates from 
year to year, until the same have been retired. 

In the hypothetical case given in the reorganization 
certificate above referred to, the corporation to be re- 
organized is supposed to be a foreign corporation, and 
one of the principal objects to be attained is a reduction 
of its capitalization and otherwise placed upon a sane 
working basis. 

Appraisal of Property. This form may be utilized 
and adopted by either a Board of Directors in their 
official capacity, or by disinterested persons in ap- 
praising property, and form the basis of a resolution 



APPENDIX. 195 

for purchasing an established business or property for 
the use of a corporation. 

Where such appraisal has been made in detail, that 
is, where an itemized schedule of the property ap- 
praised is made, this should be attached and referred 
to, in the appropriate part of the narrative, in relation 
: to the subject matter of the appraisal. 

Appraisal companies usually have approved forms 
j for setting up and classifying assets, that make the 
form referred to here, applicable as a summary and 
I convenient as a basis for the resolution following. 

Resolution Ratifying Commissioners ' Acts, Etc. 
I This resolution is sufficient for the use of Directors 
5 (when ratifying the acts of the commissioners appointed 
, by the Secretary of State in advance of complete or- 
ganization, as in Illinois) or where property has been 
taken and the purchase price has been paid in whole 
or part with stock of the corporation, and the amount 
agreed upon credited on the stock subcription accounts 
of the owners of the property conveyed. 

Installment Certificate and Assignment. Such a 
certificate as is here suggested is frequently issued by 
mining corporations, or those interested in disposing 
of a portion of the capital stock after the corporation 
is formed. Its issuance will prevent stockholders 
offering for sale or disposing of their stock, pending 
the period reserved for the sale of the stock remaining 
in the Treasury of the corporation. 

General By-Laws. Where the by-laws of a corpora- 
tion or the permanent features thereof are made a 
part of the charter, the form here suggested, with 



196 APPENDIX. 

such, modifications and conditions as the incorporators 
may desire, can be adopted by the stockholders; but 
where the adoption of by-laws is left to the Board of 
Directors of the corporation after they are elected, 
(as in Illinois) such by-laws should be presented to 
the Board, and formally adopted by it at the first 
meeting after the Certificate of Complete Organization 
or charter, has been filed for record in the proper 
recording office of the state creating the corporation. 

Innumerable additions or changes may be made to 
meet the requirements of incorporators; but the form 
here suggested with such modifications as will fit the 
particular case, is adequate for the needs of the or- 
dinary business corporation. 

The importance of by-laws has already been given 
in the text. So far as their legal necessity is con- 
cerned, their primary function is to control and 
authorize the time and method of calling and holding 
meetings; without them great inconvenience may re- 
sult and expense be necessary to give the actual notice 
which the law requires, where there are no provisions 
made for otherwise serving such notice by the corpora- 
tion, through its by-laws ot by statute. 

The remaining forms and illustrations are given for 
the convenience and ready use of incorporators; in- 
dividual reference to them is deemed unnecessary and 
impracticable within the limitations of this volume. 



GENERAL CONTRACT 

TO 
FORM A CORPORATION 

This Agreement made this first day of November, 
A. D., 1909, by and between the undersigned, John 
Brown, William Burbank, Edward Cunningham and 
Eaymond Williams, all of the City of Chicago and 
State of Illinois. 

Witnesseth, That in consideration of the mutual 
undertakings and agreements of the parties hereto, 
as hereinafter set forth, and in further consideration 
of the sum of one dollar by each of the said parties 
to the other in hand paid (at the time of the execution 
hereof), the receipt of which is hereby severally 
acknowledged, the said parties to this contract hereby 
agree by and among themselves and with each other 
as follows, to-wit : 

First, That a corporation shall be formed by us un- 
der the laws of Illinois substantially as follows : 

(a) The name thereof to be the Perfect Automobile 
Company. 

(b) The capital stock of said corporation to be One 
Hundred Thousand ($100,000.00) Dollars, divided into 
one thousand (1,000) shares of One Hundred ($100.00) 
Dollars each, said stock to be all Common Stock of 
uniform character and usual form. 

(c) The purpose of said corporation to be sub- 

(197) 



198 



APPENDIX. 



stantially for the manufacture and sale of automobiles 
and their parts. 

(d) Said corporation shall have a Board of Directors 
consisting of five in number, who shall all be stock- 
holders of record at the time of their election. 

(e) The officers of said corporation shall be a 
President, Vice-President, Secretary, Treasurer and 
General Manager. 

(f ) The location of the principal office to be at Chi- 
cago. 

(g) The duration of said corporation to be 99 years. 
Second, We hereby agree with each other, and the 

one with the other, that we will take the number of 
shares of the capital stock of said corporation set op- 
posite our respective names hereunto subscribed, and 
will pay to the commissioners duly appointed by the 
Secretary of State of Illinois in that behalf, fifty 
(50%) per cent, of the par value of the said shares so 
subscribed by us respectively at the time of holding 
the first meeting of the said subscribers to elect a 
Board of Directors for said corporation; and we 
further agree to pay the balance of our said subscrip- 
tions whenever called upon so to do by the Board 
of Directors of said corporation, after the same shall 
be formed. 

Third, We further nominate, constitute and appoint, 

( ) as our (attorney or) agent, and the 

agent (or attorney) of the said corporation so to be 
formed, to create or cause to be created the said cor- 
poration in accordance with the laws of Illinois and this 



APPENDIX. 



199 



agreement, and to do and perform all things necessary 
to bring said corporation into legal existence; and we 
further authorize and empower our said agent (or 
attorney) to draw on the funds in the hands of the 
legally constituted officers or agents of said corpora- 
tion, for the necessary expenses attending said incor- 
poration, and we further agree that any and all con- 
tracts which our said (attorney or) agent may make in 
such matter shall be binding upon said corporation and 
also upon us jointly and severally. 

In Witness Whekeof, we, the undersigned, hereby 
severally bind ourselves, our heirs, executors and ad- 
ministrators. 



NAME 



ADDKESS 



SHAKES 



AMOUNT 



SPECIAL CONTRACT 

TO 
FORM A CORPORATION 

This Agreement made and entered into this first 
day of December A. D., 1909, by and between John 
Brown, party of the first part, and "William Burbank, 
Edward Cnnningham, Frank Smith and Eaymond Will- 
iams, parties of the second part, all residents of the 
City of Chicago in the State of Illinois : 

Witnesseth, That Whereas, the said party of the 
first part is the owner of and now operating under his 
own name, the manufacturing plant and business 
located at 279 Michigan Avenue in the City of Chicago, 
said business consisting of special tools and machinery 
for the manufacture of automobiles and their parts, 
and also a stock of raw material for the conduct of 
said business, as well as various new and second hand 
machines particularly enumerated and set forth in the 
inventory attached hereto marked " Exhibit A"; 

And Whereas, the said parties of the second part are 
desirous of becoming interested in and identified with 
said business on substantially the following terms 
and conditions: 

Now, Therefore, it is Hereby Agreed : That in con- 
sideration of the mutual undertakings and agreements 
of the parties hereto, as hereinafter set forth, and in 
further consideration of the sum of One Dollar by each 

(201) 



202 APPENDIX. 

of the said parties to the other in hand paid (at the 
time of the execution hereof), the receipt of which is 
hereby severally acknowledged, the said parties of this 
contract hereby agree by and among themselves and 
with each other as follows, to-wit : 

First, that a corporation shall at once be formed by 
us under the laws of Illinois substantially as follows : 

(a) The name thereof to be The Perfect Automobile 
Company. 

(b) The capital stock of the said corporation to be 
Two Hundred Thousand ($200,000.00) Dollars, divided 
into Two Thousand (2000) shares of one hundred 
($100.00) Dollars each, said stock to be all common 
stock of uniform character and usual form. 

(c) The purpose of said corporation to be sub- 
stantially for the manufacture, purchase and sale of 
automobiles and their parts. 

(d) Said corporation shall have a Board of Directors 
consisting of five in number, who shall all be stock- 
holders of record at the time of their election. 

(e) The officers of said corporation shall be a Pres- 
ident, Vice-President, Secretary, Treasurer and 
General Manager. 

(f ) The location of the principal office to be at Chi- 
cago. 

(g) The duration of said corporation to be 99 years. 
Second, the parties hereto agree to subscribe, take 

and pay for the said shares of stock in the following 
proportion and manner, namely : said party of the first 

part shall subscribe for shares of said capital 

stock; the balance of said shares of stock shall be sub- 



APPENDIX. 203 

scribed for by the said parties of the second part as 

follows: said Burbank shares, said Cunningham 

shares, said Smith shares, and said "Will- 
iams shares. 

Third, the said parties of the second part severally 
agree to pay nnto the Commissioners appointed by the 
Secretary of State of Illinois, for the benefit of said 
proposed corporation, fifty (50%) per cent of the par 
value of said shares of stock so subscribed for by them 
at the time and whenever the said commissioners shall 
convene and hold the first meeting of the subscribers 
of said capital stock, and they further agree to pay 
the balance remaining due and unpaid upon said 
shares so subscribed for by them in cash into the 
Treasury of said corporation, as soon as they may 
be called upon so to do by the Board of Directors of 
said Corporation when formed. 

Fourth, as soon as said corporation shall be fully 
organized the said party of the first part hereby agrees 
to convey, by good and sufficient instrument of con- 
veyance a clear and perfect title to said manufacturing 
plant and business as enumerated and set forth in the 
inventory attached hereto as Exhibit "A", aforesaid, 

and to accept in payment therefor ( ) shares 

of the capital stock of said corporation at its par value, 

namely ( ) Dollars, and the balance of said 

purchase money for said manufacturing plant and as- 
sets amounting to Dollars, in cash ; the same to 

be paid upon the tendering of a good and legal convey- 
ance of said plant and assets by the said party of the 
first part, to said corporation when formed. 



204 APPENDIX. 

Fifth, it is agreed between the parties hereto that 
said parties shall constitute the first Board of Directors 
of said corporation, and that in consideration of the 
experience and former connection with the said 
business by the said party of the first part, that he 
shall be the General Manager of the same and receive a 
salary from said corporation for his services in that be- 
half amounting to Dollars per annum, payable in 

equal monthly installments of Dollars per month, 

and that a contract shall be made between the said 
corporation and the said party of the first part 
whereby his said services as General Manager shall 
be so secured and continued for a period of two (2) 
years from and after the incorporation of said com- 
pany as aforesaid ; that as said General Manager said 
party of the first part shall employ all labor and pur- 
chase all material and supplies necessary for the con- 
duct of said business, and have general supervision of 
the mechanical department thereof subject to the 
control of the Board of Directors ; and that said party 
of the first part shall devote his entire time, attention 
and best endeavors to the business of said corporation 
for and during the period aforesaid. 

Sixth, it is understood and agreed that the said party 
of the first part shall assume and pay all outstanding 
obligations of every kind and nature existing at the 
time of the sale and conveyance of said manufacturing 
plant as aforesaid, and that he is to retain only the 
current book accounts and monies due the said 
business at the time of said conveyance aforesaid; 
that all other kinds of property and property rights 



APPENDIX. 205 

now owned and enjoyed by said business, including 
its good-will, shall be legally conveyed and inure to 
the said corporation when formed, and that he shall 
warrant and defend the title to said business and as- 
sets against all claims whatsoever. 

Seventh, we further nominate, constitute and ap- 
point , as our (attorney or) agent, and the agent 

(or attorney) of the said corporation so to be formed, 
to create or cause to be created the said corporation 
in accordance with the laws of Illinois and this 
agreement, and to do and perform all things necessary 
to bring said corporation into legal existence ; and we 
further authorize and empower our said agent (or at- 
torney) to draw on the funds in the hands of the legally 
constituted officers or agents of said corporation, for the 
necessary expenses attending said incorporation, and 
we further agree that any and all contracts which our 
said (attorney or) agent may make in such matter 
shall be binding upon said corporation and also upon 
us jointly and severally. 

This contkact shall be binding upon the heirs, exec- 
utors, administrators, successors and assigns of the 
respective parties hereto. 

In witness whekeof the parties hereto have here- 
unto set their hands and seals the day and year first 
above written. 



206 APPENDIX. 



Keorgastization Cektificates. 

This is to Certify That Bichard Eoe of Chicago, 
Illinois (hereinafter designated as the transferor), 
has transferred and delivered to William Smith (here- 
inafter designated as the transferee), Certificate No. 
23 for 1,000 shares of the capital stock of The Doe 
Electrical Mfg. Co., for the purposes and upon the 
conditions following, viz.: 

First. That the transfer above named is made to 
enable the said transferee to effect a reorganization 
of the said company, by reincorporating the same 
under the laws of the State of Illinois; said Illinois 
corporation to be known by the same or similar name 
as the present organization, and to have a capital 
stock of $125,000 ; that the new corporation, when 
formed, shall have $10,000 in cash paid in its treasury, 
after all obligations of the present company are dis- 
charged; and also to have in its treasury $15,000 — 
face value — of its capital stock for sale, at par; that 
said corporation, when reorganized by said trans- 
feree, shall possess and own by transfer from the 
Board of Directors of the present corporation all the 
assets thereof. 

Second. That the said transferee agrees to de- 
liver, and the said transferor agrees to receive, in 
lieu of said stock certificate, a new certificate in the 
said reorganized company, for 50 shares of its capi- 
tal stock at the par value of $10.00 per share, fully 
paid and non-assessable. 

Third. It is further understood that this agree- 
ment is made, and the said reorganization is contem- 
plated, for the purpose of discharging the obligations 
of the said The Doe Electrical Mfg. Co., and 
to preserve its assets for the benefit of all its stock- 



APPENDIX. 207 

holders, equally, and that to accomplish said objects 
the said transferee is hereby vested with all the 
powers and rights of ownership, in and to the said 
stock so transferred, and with full power to consum- 
mate said reorganization in accordance herewith. 

Fourth. It is further agreed that the said trans- 
feree shall perfect said reorganization, as soon as 
may be after all the outstanding; stock in the present 
corporation is transferred and surrendered under the 
terms of this certificate; that upon his failure or ina- 
bility so to do, within a reasonable time, he shall re- 
deliver and transfer said certificate to the said trans- 
feror. 

In Testimony Whereof, the said parties hereto, have 
hereunto set their hands, and affixed their seals, at Chi- 
cago, Illinois, this 4th day of May, A. D. 1907. 

Eichard Boe, [Seal.] 
William Smith, [Seal.] 



208 appendix. 

Form of Appraisal, of Property, to be Accepted by a 
Corporation in Payment for Stock. 

Chicago, Illinois, May 12th, 1907. 
We, the undersigned commissioners,* (heretofore, 
on the 29th day of April, 1907, appointed by the Sec- 
retary of State of Illinois), having carefully examined, 
investigated and valued the plant, machinery, assets 
and good will of the business, heretofore owned and 
controlled by The Doe Electrical Mfg. Co., of 333 
Plymouth Avenue, in the City of Chicago, do appraise 
said assets of said business as follows: 
Machinery, tools, lathes, presses, etc., 
etc., as per inventory attached hereto, 

marked Exhibit "A" .... $64,900.00 

Stock of finished and unfinished product 
and merchandise, as per inventory at- 
tached hereto, marked Exhibit "B'\. 25,400.00 
Office outfit and fixtures as per inven- 
tory attached hereto, marked Exhibit 

"C" 1,200.00 

Good will and intangible rights as per as- 
signments and conveyances hereto at- 
tached, marked Exhibits "D," "E" 
and "F" 8,500.00 

Total appraised value $100,000.00 

Eespectfully submitted, 

William Johnson, ) Commissioners 

Henby Smith, V {qt Board of Directors)# 

Henry Jones, J 

♦By here substituting the word Directors, in place of the word Commis- 
sioners the form may also be utilized by them. 



APPENDIX. 



209 



Resolution Ratifying Commissioners' Acts in Ap- 
praising and Accepting Assets to be Turned in to 
a Corporation, in Exchange for Stock, upon a Re- 
organization. 

Whereas, This company was organized for the 
purpose of engaging in the manufacture and sale of 
electrical appliances and supplies, and particularly to 
acquire, own and operate the business heretofore 
owned and conducted by The Doe Electrical Mfg. Co., 
at 333 Plymouth Avenue, in the City of Chicago, and 

Whereas, It appearing to the Board of Direct- 
ors of this company that the commissioners, hereto- 
fore on to-wit : the 9th day of May, 1907, appointed by 
the Secretary of State of Illinois to open books of 
subscription to the capital stock of this company, did 
in accordance with their authority and duty in the 
premises on to-wit: the 21st day of May, 1907, ap- 
praise and take over, as such commissioners and trus- 
tees for this company, the plant, business and assets of 
The Doe Electrical Mfg. Co., and are now holding the 
same as such commissioners and trustees subject to 
the action of this Board; and, 

Whereas, It further appears, from the minutes 
and proceedings of said commissioners, recorded in 
the minute book of this company, that said plant and 
assets were duly appraised and valued at the sum of 
I One Hundred Thousand ($100,000) Dollars, and that 
the said appraisal and valuation were carefully and 
properly made, and the valuation placed thereon is, 
in the judgment of this Board, fair and reasonable; 
and, 

Whereas, Said property and assets have been 
re-appraised by this Board, and valued at said sum 



210 APPENDIX. 

of One Hundred Thousand ($100,000) Dollars, and it 
is the concensus of opinion of this Board that the ac- 
quiring of said property is essential to the best inter- 
ests of this company, in order that it may become im- 
mediately a going and paying concern. 

Therefore, be it Resolved, That this company do 
purchase of the said, The Doe Electrical Mfg. Co., 
through said commissioners,* the said goods, chat- 
tels and property mentioned and set forth in the 
minutes and proceedings of the said commissioners 
herein recorded, and set forth in the bill of sale ac- 
companying said transfer to them, from said, The 
Doe Electrical Mfg. Co., and that the action of said 
commissioners in the premises be and the same 
is in all respects, hereby ratified, confirmed and 
adopted; and that the President and Secretary of this 
company be, and they are hereby authorized, em- 
powered and directed to issue on behalf of this com- 
pany, ten thousand (10,000) shares of its capital stock 
at par, to the several stockholders of The Doe Elec- 
trical Mfg. Co., as their rights appear by the terms of 
said sale, and in accordance with the resolution of 
the Board of Directors of said, The Doe Electrical 
Mfg. Co., conveying said property to said commis- 
sioners, in payment for said goods, chattels, and 
property, and the Treasurer of this company is also 
hereby authorized and directed to credit the said sum 
of One Hundred Thousand ($100,000) Dollars upon 
the subscription of William Smith to the capital stock 
of this compa ny heretofore made by him. 

* Or Directors. 



APPENDIX. 211 



Receipt to be issued by the Commissioners in Illinois 
( ob by a Trustee in Any State) fob Payment on 
Account of Stock Subscription, in Advance op 
Complete Organization. 



No J No No. of shares . 

I 
I 



Shares. 



The John Doe Electric Co., 
Chicago. 

I* 

This certifies, that 

of... , 

I being an original subscriber for 

shares of the capital stock 

J of The John Doe Electric Co. 
| (a corporation in process of or- 
| ganization under the laws of the 

Name I State of Illinois), at its par value 

| of $10.00 per share, has paid to 
| us, as commissioners, duly ap- 
| pointed by the Secretary of State 
| of Illinois (and also trustees), 
I for said corporation, the sum of 

[ dollars, to apply on 

■ account of said subscription, in 
accordance with its terms, the 

same being $ of the total 

I amount thereof. 

.This receipt is issued on be- 



212 



APPENDIX. 



Amount, 

$ 



Installment, 



Date, 



.190. 



half of said The John Doe Elec- 
teic Co., and upon the condition 
that as soon as the said corpora- 
tion is fully organized, that said 
payment hereby acknowledged 
will be credited on the said sub- 
scription, and that upon the sur- 
render of this receipt by the 
owner thereof, and the payment 
of the balance due upon said sub- 
scription, according to its terms, 
a regular and duly executed stock 
certificate of said corporation will 
be issued to the said subscriber 
or his assignee. 
Dated at Chicago, His., this 

day of A. D., 

190... 



I 



Commissioners 
(or Trustees). 



appendix, 213 

Assignment of the Foregoing Commissionebs' Be- 
ceipt and the sljbscbiption undeb which the 
Same is Issued. 

For Value Received hereby sell, 

assign and transfer unto 

all my rights, title and in- 
terest in and to the subscription heretofore made by 

me to shares of the capital stock of The John 

Doe Electric Co., together with the payment 
made thereon, as evidenced by the within Commis- 
sioners' receipt. 

This assignment and transfer is made upon and in 
accordance with the terms and conditions of my said 
subscription, and I do hereby authorize and instruct 
the duly authorized officers of said corporation to 
issue the stock subscribed for by me, to the order of 

my said assignee upon compliance with 

all the conditions of my said subscription and the due 
surrender of this certificate. 

Dated at this day of 

.... A. D. 190 

[Seal.] 
Witness, 



214 



APPENDIX. 



Installment Certificate, for Use of a Corporation 
when Selling Stock to be Paid For in Install- 
ments. 



No...., 



Shares. 



Name, 



Rec'd on Acc't. 
$ 



No. 



. Shares 



The John Doe Electric Co., 
Chicago. 



$. 



This certifies that 

, a subscriber for. 



Shares of the Capital Stock of 
The John Doe Electric Co., at 
its par value of $10.00 per share, 
has this day paid into the treas- 
ury of said corporation to be ap- 
plied on account of said subscrip- 
tion, the sum of $ ,same 

being an installment of $ 

per share. 

It is mutually agreed between 
the holder hereof, and The John 
Doe Electric Co., that the issu- 
ance of said shares of stock is 
subject to the conditions of the 
said subscription, and that the 
regular stock certificates of said 
corporation are not to be issued 
thereunder, until the first day of 
June, A. D., 1908 ; and that upon 
the payment of the remaining in- 
stallments of said subscription in 



APPENDIX. 215 

1 accordance with its terms, and 
the due surrender of this certifi- 
i cate, such regular stock certifi- 
cate will, upon said first day of 
June, 1908, be duly issued to the 
7 said subscriber or his assignee. 

Dated at Chicago, 111., this 

I day of , 1907. 



Treasurer. 
[Corporate Seal..] 
Attest : 

Secretary. 



216 APPENDIX. 



Assignment of the Foregoing Installment Certif- 
icate, and the Subscription Under Which the 
Same is Issued. 

For Value Eeceived hereby sell, assign and 

transfer unto all my rights, 

title and interest in and to the subscription heretofore 

made by me to shares of the capital stock of The 

John Doe Electric Co., together with the payment 
made thereon, as evidenced by the within installment 
certificate. 

This assignment and transfer is made upon, and in 
accordance with, the terms and conditions of my said 
subscription, and is subject to the conditions thereof; 
and I do hereby authorize and instruct the duly author- 
ized officers of said corporation to issue the stock sub- 
scribed for by me, to the order of my said assignee on 
the first day of June, A. D. 1908, upon com- 
pliance with all the conditions of my said subscription 
and the due surrender of this certificate. 

Dated at this day of A. D. 190. . 

[Seal.] 

Witness 



APPENDIX. 217 



BY-LAWS 

OF 

THE JOHN DOE ELECTRIC CO. 
Aktiole I. 

BOAKD OF DIEECTOES. 

Sec. 1. The Board of Directors of this Company 
shall consist of five (5) stockholders, who shall hold 
their respective offices for one (1) year, and until their 
successors are elected. 

Aeticle II. 

OFFICEES. 

Sec. 1. The officers of this company shall consist 
of a President, a Vice President, a Secretary and a 
Treasurer, and such other officers and agents as shall, 
from time to time, be deemed necessary by the Board 
of Directors. 

Sec. 2. Such officers shall hold their respective 
offices for the period of one (1) year following their 
election, and until their successors are elected, and with 
salary, if any, as shall be provided by the directors. 

Sec. 3. Any officer may be removed by the Board 
of Directors, when, in their judgment, the interests of 
the company so requires. 



218 APPENDIX. 

Article III. 

STO CKHOLDERS 9 MEETINGS. 

Sec. 1. The annual meeting of the Stockholders of 
this company shall be held at its principal office in 
Chicago on the second Tuesday of May of each year at 
the hour of three o'clock p. m. 

Sec. 2. A notice of such meeting, giving the day 
and the hour thereof, shall be signed by the secretary, 
and mailed to each stockholder of record as the stock- 
holder's address appears on the books of the com- 
pany, or so far as the same are known to the secre- 
tary, at least ten (10) days before said meeting day. 

Sec. 3. Any business may be transacted at such an- 
nual meeting without specifying the same in the notice 
therefor. 

Sec. 4. The president, or any two (2) members of 
the Board of Directors, may call special meetings of the 
stockholders of this company, which shall be held at 
the general office of the company in Chicago, or at 
such other place, in the City of Chicago, and at such 
hours, as the president or such directors may deter- 
mine; and a notice, briefly stating the subjects which 
will come before such special meeting, shall be mailed 
to each stockholder at his last known address, at least 
five (5) days before the time for holding said meetings. 

Akticle IV. 

MEETINGS OP BOARD OF DIRECTORS. 

Sec. 1. The regular annual meeting of the Board of 
Directors of this company shall be held on the second 



_ r 

Tuesday of May, at the office of the company in 
Chicago, immediately after the annual stockholders' 
meeting. 

Sec. 2. Three (3) of the Board of Directors shall 
constitute a quorum for the transaction of any business 
at any meeting. 

Sec. 3. The president of this company may call 
special meetings of the Board of Directors whenever 
he may deem it necessary so to do. 

Sec. 4. The secretary shall, upon the request of the 
president, mail postpaid to the address of each di- 
rector, so far as the same appears on the company's 
books, a notice of all special directors' meetings and 
shall specify briefly therein, the subjects that will 
come before the meeting, at least five (5) days before 
such meeting day. 

Sec, 5. No business shall be transacted at any 
special directors' meeting, except that specified in the 
notice or call therefor. 

Article V. 

ORDER OF BUSINESS AT ALL MEETINGS. 

Sec. 1. The order of business at all meetings of the 
Board of Directors and Stockholders, shall be as 
follows : 

First— Eoll call. 

Second — Beading minutes of last meeting. 

Third — Considering communications to the Board 
or Stockholders. 



220 APPENDIX. 

Fourth — Beports of officers to the Board or Stock- 
holders. 

Fifth — Unfinished business. 

Sixth — Original resolutions and new business. 

Article VI. 

THE PRESIDENT. 

Sec. 1. The president shall preside over all meet- 
ings of the Board of Directors and Stockholders, at 
which he may .be present. 

Sec. 2. In the absence of the president at any di- 
rectors' meetings, the vice president shall be the acting 
president for such meetings. 

Sec. 3. In case the office of treasurer and that of 
president of this company shall be filled by different 
persons, then all notes and bonds, or other evidences 
of indebtedness, shall be countersigned by the presi- 
dent. 

Sec. 4. The fact that a director presides as presi- 
dent or chairman of any meeting of the Board of Di- 
rectors, or stockholders, shall not prevent his voting, 
the same as though he were not president or chairman. 

Article VII. 
vice president. 

Sec. 1. The vice president of the company shall 
take an active part in the conduct of the business, and 
his duties and responsibilities shall be determined, 
from time to time, by the Board of Directors. 



I 



APPENDIX. 



221 



Sec. 2. In the absence of the president at any di- 
rectors ' meetings, or in his absence from the city for 
any protracted period, the vice president shall be the 
acting president. 

Akticle VIII. 

THE SECRETARY. 

Sec. 1. The secretary of the company shall attend 
all meetings of the stockholders and directors when 
practicable ; in his absence a secretary pro tern, or act- 
ing secretary shall be appointed. 

Sec. 2. The secretary shall keep a correct record 
of the proceedings of the Board of Directors and of 
the stockholders in the corporate record book of the 
company, and he shall perform such other duties, from 
time to time, as the Board of Directors may designate 
by resolution. 

Sec. 3. The secretary shall countersign all checks 
drawn upon the funds of this company. 

Article IX. 

THE TREASURER. 

Sec. 1. The treasurer shall keep the moneys of the 
company in such bank, or banks, as may be designated 
by the Board of Directors; the deposit account shall 
be kept in the name of the corporation. 

Sec. 2. He shall sign all checks, drafts, notes, or 
other evidences of indebtedness, for and on behalf of 
the company, and have full charge of its financial 



222 APPENDIX. 

affairs, subject, however, to the direction of the Board 
of Directors. 

Sec. 3. All checks drawn by the treasurer shall be 
countersigned by the secretary before they are issued. 

Sec. 4. The treasurer shall take an active part in 
the conduct of the business, and his duties and respon- 
sibilities shall be determined, from time to time, by the 
Board of Directors. 

Article X. 

ANNUAL, REPORTS. 

Sec. 1. It shall be the duty of all officers of the cor- 
poration to make full and complete written reports to 
the Board of Directors annually, on the second Tues- 
day of May in each year, of all matters pertaining to 
their respective offices, and the board may require 
any officer of the corporation, at any time, to make 
such reports, touching the business of his office, as they 
shall deem necessary. 

Article XL 

CHECKS, DRAFTS, MORTGAGES AND BONDS. 

Sec. 1. All checks and drafts shall be signed in the 
company's name by the treasurer, and countersigned 
by the secretary. 

Sec. 2. In case the office of treasurer and that of 
president of this company shall be filled by different 
persons, then all notes, bonds or other evidences of in- 
debtedness, shall be countersigned by the president, be- 
fore they are issued. 



APPENDIX. 223 

Sec. 3. In case of the issuing of any mortgages or 
bonds on the plant or property of the company, it shall 
not be necessary to the validity thereof; that authority 
be obtained from the stockholders ; the directors of the 
company shall have full power, right and authority to 
pledge the plant and assets of the company to raise 
necessary working funds therefor ; or to secure any ex- 
isting debts. 

Akticle XII. 

CERTIFICATES OF STOCK. 

Sec. 1. All certificates of stock shall be signed by 
the president and secretary, and attested by the seal 
of the company. 

Sec* 2. Capital stock shall be transferable only on 
the books of the corporation, upon return and delivery 
of the certificate so transferred, duly endorsed; the 
secretary shall cancel the same and issue a new certi- 
ficate or certificates to the assignee. 

Sec. 3. No person shall be entitled to vote at any 
meeting of the stockholders, unless his ownership of 
stock shall appear on the books of the company on 
the first day of the month preceding the time of such 
meeting, except in case of executors or administrators. 

Sec. 4. Any stockholder may vote by proxy, duly 
authorized in writing and presented and filed with the 
secretary. 

Sec. 5. In case of loss or destruction of stock cer- 
tificates by the owners thereof, new certificates may 
only be issued upon such terms and conditions as the 
Board of Directors may impose. 



224 APPENDIX. 

Article XHL 

SALARIES. 

Sec. 1. No salaries of any kind shall be paid to or 
claimed by any officer of this company, (as such) unless 
the amount of such salary is fixed and provided for by 
order or resolution of the Board of Directors, adopted 

prior to the performance of the services in question 
and recorded in the minute book of the company. 

Article XIV. 

VACANCIES. 

Sec. 1. Vacancies in any of the offices, or in the 
Board of Directors may be filled, by the directors of 
this Company for the unexpired term, at any regular 
or special meeting of the Board. 

Sec. 2. In the absence or disability of any officer 
or agent, the directors may, if they see fit, appoint in 
his stead an acting officer or agent who shall perform 
the duties of his office, during such absence or disa- 
bility, under the directions of, and to be governed by 
the Board of Directors. 

Article XV. 

ADDRESSES. 

,Sec. 1. It shall be the duty of each stockholder, 
officer and director to inform the secretary of his post- 
office address, and of any change in the same; and it 
shall be the duty of the secretary to keep a book of 
such addresses. 



APPENDIX. 225 

Sec. 2. Notices, mailed post paid, to the addresses 
so given shall be deemed sufficient notice for any and all 
purposes. 

Article XVI. 

DIVIDENDS. 

Sec. 1. Dividends may be declared from the profits 
of the company, at such times, and in such amounts, as 
the Board of Directors shall, from time to time, deem 
proper. 

Article XVII. 

CORPORATE SEAL. 

Sec, 1. It shall be the duty of the Board of Direc- 
tors, at their first meeting, to adopt a corporate seal 
for the corporation; and to affix an impression of the 
same upon the record book of the corporation opposite 
this article. 

Article XVIII. 

AMENDMENTS. 

Sec. 1. These by-laws, or any of them, may be 
altered, amended, or repealed at any regular or spe- 
cial meeting of the Board of Directors, and at such 
meetings new by-laws may be added; provided thirty 
(30) clays written or printed notice shall be given to all 
stockholders of any such intended alteration, amend- 
ment or repeal. 



226 APPENDIX. 

Adopted, this 16th day of May, 1907. 

John Doe, 
Bichakd Eoe, 
William Smith, 
Henky Bkown, 
James Johnson", 
Attest : 

Henky Jones, 

Secretary. 



APPENDIX. 



227 



Fosm op Assignment of Invention Before Patent. 
(From "Rules of Practice," U. S. Pateut Office.) 



W 

a: 



Whekeas, I, John Jones, of Chicago, in the County 
of Cook, and State of Illinois, have invented a certain 
new and useful improvement in electric engines, for 
which I am about to make (or have heretofore on the 

. .day of A. D. 190 made) 

pplication for Letters Patent of the United States;* 

And Whekeas, "William Smith of Chicago, County 
of Cook, State of Illinois, is desirous of acquiring an 
interest in the said invention and in the Letters Patent 
to be obtained therefor; 

Now, Thekefoke, To all whom it may concern, be it 
known that, for and in consideration of Five Thousand 
Dollars, to me in hand paid, the receipt of which is 
hereby acknowledged, I, the said John Jones, have 
sold, assigned and transferred, and by these presents 
do sell, assign and transfer unto the said William 
Smith the full and exclusive right to the said invention, 
as fully set forth and described in the specification pre- 
pared and executed by me on the 5th day of March, 
1907, preparatory to obtaining Letters Patent of the 
United States therefor ; and I do hereby authorize and 
request the Commissioner of Patents to issue the said 
Letters Patent to the said William Smith, as the as- 
signee of my entire right, title and interest in and to 
the same, for the sole use and behoof of the said 
William Smith and his legal representatives. 

♦If application for Letters Patent have been made, give number of ap- 
plication, as well as date. 



228 APPENDIX. 

In Testimony Whereof, I have hereunto set my 
hand, and affixed my seal, this 25th day of June, 1907, 

John Jones. [Seal.] 
Iii the presence of 

Harry Williams. 



APPENDIX. 



229 



Form of Assignment of Undivided Interest in Let- 
ters Patent. 

(From "Bules of Practice," U. S. Patent Office.) 
Whereas, I, John Jones, of Chicago, County of 
Cook, and State of Illinois, did obtain Letters Patent 
of the United States, for an improvement in electric 
engines, which Letters Patent are numbered * * * 
and bear date the 30th day of June, in the year 1907 ; 
and whereas William Smith, of Chicago, County of 
Cook, and State of Illinois, is desirous of acquiring an 
interest in the same : 

Now, Therefore, To all whom it may concern, be it 
known that, for and in consideration of the sum of 
One Thousand ($1,000) Dollars, to me in hand paid, 
the receipt of which is hereby acknowledged, I, the said 
John Jones, have sold, assigned and transferred, and 
by these presents do sell, assign and transfer unto the 
said William Smith the undivided one-half part of the 
whole right, title, and interest in and to the said in- 
vention, and in and to the Letters Patent therefor 
aforesaid; the said undivided one-half part to be held 
and enjoyed by the said William Smith for his own 
use and behoof, and for the use and behoof of his legal 
representatives, to the full end of the term for which 
said Letters Patent are or may be granted, as fully and 
entirely as the same would have been held and en- 
joyed by me had this assignment and sale not been 
made. 
In Testimony Whereof, I have hereunto set my 



: 



1230 APPENDIX. 

hand, and affixed my seal, at Chicago, in the County of 
Cook, and State of Illinois, this 6th day of July, A. D. 
1907. 

John Jones. [Seal.] 
In presence of 

Hakry Williams. 



appendix. 231 

Fokm of Assignment of Entire Interest in Patent. 
(From "Bules of Practice," U. S. Patent Office.) 

Whereas, John Jones, of Chicago, in the County of 
Cook, and State of Illinois, did obtain Letters Patent, 
of the United States, for an improvement in electric 
engines, which Letters Patent are numbered * * * 
and bear date the 30th day of June, in the year 1907 ; 

And, Whereas, I am now the sole owner of said 
patent, and of all rights under the same ; and, whereas, 
The John Doe Electric Co. (a corporation of Illi- 
nois), of Chicago, County of Cook, State of Illinois, 
is desirous of acquiring the entire interest in the 
same: 

Now, Therefore, To all whom it may concern, be it 
known that, for and in consideration of the sum of 
ten thousand dollars, to me in hand paid, the receipt of 
which is hereby acknowledged, I, the said John Jones, 
have sold, assigned and transferred, and by these pres- 
ents, do sell, assign and transfer, unto the said, The 
John Doe Electric Co., the whole right, title and in- 
terest in and to the said improvements in Electric En- 
gines and in and to the Letters Patent therefor afore- 
said ; 

The same to be held and enjoyed by the said The 
John Doe Electric Co., for its own use and behoof, 
and for the use and behoof of its legal representatives, 
to the full end of the term for which said Letters 
Patent are or may be granted, as fully and entirely as 



1232 APPENDIX. 

the same would have been held and enjoyed by me had 
this assignment and sale not been made. 

In Testimony Whebeof, I have hereunto set my 
hand and affixed my seal, at Chicago, in the County of 
Cook, and State of Illinois, this 18th day of May A. D. 
1907. 

John Jones. [Seal.] 
Signed, sealed and delivered in presence of 

William Smith. 



appendix. 233 

Form op Coal. Option, 

With Deferred Payments: 

This agreement, Made and entered into this 

day of 190 , between 

of County, , party of 

the first part, and of , 

party of the second part : 

Witnesseth, That the party of the first part in con- 
sideration of one dollar ($1.00) and other good and 

valuable considerations to in hand paid 

by the said party of the second part, the receipt of 
which is hereby acknowledged, does hereby grant and 
sell unto said party of the second part, his heirs or 
assigns, the exclusive right, or option, for the period 
of months from the date hereof, to pur- 
chase at the price and upon the terms hereinafter 
stated, all the coal and mineral lying and being under 
the surface of the following described real estate situ- 
ate in County, to-wit: 



the said above described real estate containing 

acres of land, more or less. 

Said party of the second part hereby agrees that he 
will, within 30 days after like options are obtained on 
at least 1,000 acres of coal near or adjacent to said 
premises above described, begin drilling, and then 



234 APPENDIX. 

cause to be put down upon or in the neighborhood of 
the above described real estate, one or more drillholes 
for the purpose of ascertaining and testing the 
amount and quality of coal that may be found in said 
vicinity; and, that as soon as said drilling shall be 
completed, and it is thereby demonstrated to the satis- 
faction of the said party of the second part, that coal 
of sufficient thickness and quality underlies said above 
described premises, then and in that event, said party 
of the second part hereby agrees to pay for said coal 
above described at the price hereinafter mentioned, in 
the following manner, to-wit: First — to pay to the 
party of the first part one quarter of the purchase 
price in cash; Second — to give to the said party of 
the first part his promissory note for one quarter of 
the purchase price of said coal ; Third — to give to the 
said party of the first part his promissory note for one- 
half, or the balance, of the purchase money, said notes 
to be payable to the order of said party of the first 
part on or before one and two years, respectively, 
after the date thereof, with interest at the rate of 6% 
per annum, and the same to be secured by a mortgage 
in the usual form upon said coal and premises above 
described. 

And the party of the first part hereby agrees at or 

before the expiration of months from the 

date hereof, to convey to the said party of the second 
part, his heirs, legal representatives or assigns, by a 
good and sufficient warranty deed accompanied by a 
merchantable abstract, brought down to date, at and 

for the price of dollars per acre, to be paid 

by said party of the second part in the manner herein- 
before mentioned, all the coal and mineral lying under 



APPENDIX. 235 

said above described premises, together with, the 
right to mine, dig and remove the same therefrom, 
and together with the right to use all entries under 
said premises for the purpose of hauling, mining and 
removing coal from any other lands near or adjacent 
to the above described premises. 

And under the continuance of this option the party of 
the first part hereby grants to the party of the second 
part the right of ingress and egress over said prem- 
ises for the purpose of prospecting and drilling for 
coal on said premises, and the right to erect such 
structure or structures as are necessarily incident to 
the carrying out of said work, and hereby releases said 
party of the second part from all claims for damages 
which may arise upon account of said drilling and 
prospecting, except damage to growing crops (if any), 
for which said second party agrees to pay a just com- 
pensation. 

Said party of the first part further agrees to sell to 
said party of the second part, his heirs, or assigns, 
at any time within one year after the purchase of said 
coal as aforesaid, such portion of the surface of said 
premises as may be desired for the erection of tipples, 
buildings, power houses, railroad tracks and switches 
and other improvements for the mining, removal and 
transportation of said coal (not to exceed 30 acres, 

however) at the price of dollars per acre, and 

to convey the title to said surface to said party of the 
second part, his heirs, legal representatives or assigns, 
by a good and sufficient wakkastty deed, accompanied 
by a merchantable abstract therefor. 

It is further agreed that no shaft shall be sunk or 
railroad built within five hundred (500) feet of any 



236 APPENDIX. 

important building now standing upon said premises 
and owned by the party of the first part, except by 
special contract hereafter secured. 

Said first party further agrees that if said party of 
the second part shall be drilling and testing said prem- 
ises or premises adjacent thereto at the time of the 
expiration of this option, to then extend the time 
thereof for a period of sixty days from the date of the 
expiration hereof. 



In witness whereof, we herein bind ourselves, our 
heirs, legal representatives and assigns, and have 
affixed our hands and seals the day and year first above 
written. 

[Seal.] 

[Seal.] 

[Seal.] 

[Seal.] 

State op , ) 

>ss. 
County of , ) 

I, a Notary Public in and for 

said county, in the state aforesaid, do hereby certify 
That 

personally known to me to be the same person 

whose name subscribed to the foregoing 

instrument, appeared before me this day in person, 

and acknowledged that he signed, sealed 

and delivered the said instrument as free 

and voluntary act, for the uses and purposes therein 



APPENDIX. 237 

set forth, including the release and waiver of the right 
of homestead. 

Given under my hand and notarial seal, this 

day of... A. D. 190 



Notary Public. 



238 APPENDIX. 



Form of Coal Option, 

Payments To Be Made, Either in Whole or Part, with 
Stock of the Corporation To Be Formed for the 
Development of the Field Optioned : 

This agreement, Made and entered into this 

day of 190 , between 

of County, , party of 

the first part, and of , 

party of the second part: 

Witnesseth, That the party of the first part in con- 
sideration of one dollar ($1.00) and other good and 

valuable considerations to in hand paid 

by the said party of the second part, the receipt of 
which is hereby acknowledged, does hereby give, grant, 
sell and convey nnto said party of the second part, his 
heirs, or assigns, the exclusive right, privilege, or 

option, for the period of ..months from the 

date hereof, to purchase all the coal and mineral lying 
and being under the surface of the following described 
real estate situate in County, , to-wit : 



(said above described real estate containing 

acres of land, more or less) at and for the price of 

$ per acre, to be paid as follows, viz : 

dollars in cash, and the balance of said pur- 






APPENDIX. 



239 



chase money to be paid in Cumulative 7% Preferred 
stock of the Mining Corporation which shall be formed 
for the purpose of taking over said coal above described, 
and the balance of the field of at least 1,000 acres lying 
near or adjacent to said coal, and for the mining and 
removal of the same. It being understood and agreed 
that said corporation above referred to, shall be organ- 
ized under the laws of and have a capital stock 

of $200,000.00, the same to be equally divided into 
Cumulative 7% Preferred and Common stock, said 
preferred stock to have all the rights and privileges 
of the common stock. 

Said party of the second part hereby agrees, that he 
will, within 30 days after options are obtained on at 
least 1,000 acres of coal near or adjacent to the prem- 
ises above described, begin drilling, and then cause to 
be put down upon or in the neighborhood of the above 
described real estate, one or more drill holes for the 
purpose of ascertaining and testing the amount and 
quality of coal that may be found in said vicinity; and 
that as soon as said drilling shall be completed, and it 
is thereby demonstrated to the satisfaction of the said 
party of the second part, that coal of sufficient thick- 
ness and quality underlies said above described prem- 
ises, then and in that event, said party of the second 
part agrees to pay for said coal above described at the 
price and in the manner above set forth. 

And the party of the first part further agrees at or 

before the expiration of months from the 

date hereof to convey unto the party of the second 
part, his heirs, legal representatives, or assigns, by 
good and sufficient warranty deed, accompanied by a 
merchantable abstract, brought down to date, at and 



240 APPENDIX. 

for the price of dollars per acre, to be paid 

by said party of the second part in the manner herein- 
before mentioned, all the coal and mineral lying under 
said premises, together with the right to mine, dig and 
remove the same therefrom, together with the right to 
use all entries under said premises for the purpose of 
hauling, mining and removing coal from other lands 
near or adjacent to the above described premises. 

And under the continuance of this option the party 
of the first part hereby grants to the party of the sec- 
ond part, the right of ingress and egress over said 
premises for the purpose of prospecting and drilling 
for coal on said premises, and the right to erect such 
structure or structures as are necessarily incident to 
the carrying out of said work, and hereby releases said 
party of the second part from all claims for damages 
which may arise upon account of said drillings and 
prospecting, except damage to growing crops (if any), 
for which said second party agrees to pay a just com- 
pensation. 

Said party of the first part further agrees to sell 
to said party of the second part, his heirs, or assigns, 
at any time within one year after the purchase of said 
coal as aforesaid, such portion of the surface of said 
premises as may be desired for the erection of tipples, 
buildings, power houses, railroad tracks and switches 
and other improvements for the mining, removal and 
transportation of said coal (not to exceed 30 acres, 

however), at the price of dollars per acre, 

and to convey the title to said surface to the party of 
the second part, his heirs, legal representatives or as- 
signs, by a good and sufficient waeeanty deed, accom- 
panied by a merchantable abstract 



APPENDIX. 241 

It is further agreed that no shaft shall be sunk or 
railroad built within five hundred (500) feet of any 
important building now standing upon said premises 
and owned by the party of the first part, except by 
special contract hereafter secured. 

Said first party further agrees that if said party of 
the second part shall be drilling and testing said prem- 
ises or premises adjacent thereto at the time of the 
expiration of this option, to then extend the time 
thereof for a period of sixty days from the date of the 
expiration hereof. 



In witness whereof, we herein bind ourselves, our, 
heirs, legal representatives and assigns, and have 
affixed our hands and seals the day and year first above 
written. 

[Seal.] 

[Seal.] 

[Seal.] 

[Seal.] 

State of , ) 

County of , f 

I, a Notary Public in and for 

said county, in the state aforesaid, do hereby certify 
That 

personally known to me to be the same person 

whose name subscribed to the foregoing 

instrument, appeared before me this day, in person, 
and acknowledged that he signed, sealed 



242 APPENDIX. 

and delivered the said instrument as free 

and voluntary act, for the uses and purposes therein 
set forth, including the release and waiver of the right 
of homestead. 

Given under my hand and notarial seal, this 

day of.— A. D. 190 

Notary Public. 



APPENDIX. 



243 



Stockholder's Proxy. 



Know All Men By These Presents : 

That the undersigned being the owner of record of 
Fifty shares of the capital stock of The John Doe Elec- 
tric Co., of Chicago, do hereby make, constitute and ap- 
point Eichard Eoe, of Chicago, my true and lawful 
attorney for me and in my name, place and stead, to 
attend the annual meeting of the stockholders of said 
corporation to be held at 333 Plymouth Ave., in the 
City of Chicago, on the fifth day of May, A. D. 1908, or 
at any adjournment thereof, and to represent me, and 
for me and in my name and stead to vote at said meet- 
ing upon the said shares of stock standing in my name, 
upon any and all questions that may be presented 
thereat, and in the transaction of any other business 
which may come before said meeting, or any adjourn- 
ment thereof, as fully as I could do if personally 
present at the doing thereof, and I hereby ratify and 
confirm all that my said attorney may do by virtue 
hereof. 

1st Witness Whereof, I have hereunto set my hand 

and seal this first day of May, 1908. 

William Smith. [Seal.] 
Witness, 

Henry James. 



APPENDIX. 245 



RULES GOVERNING THE LISTING 

OF 

STOCKS AND BONDS 

ON THE 

CHICAGO STOCK EXCHANGE. 
"Article XIX." 

"APPLICATION TO PLACE STOCKS, ETC., ON THE LIST." 

"Sec. 1. All applications for placing securities on 
the regular list shall be made to the Committee on 
Stock List in writing, and signed by the parties desir- 
ing to have the securities listed." 

"Sec. 2. If a stock, the application must state the 
amount of authorized capital, which in every case 
must not be less than $200,000, the par value of shares, 
the number of shares issued, whether dividend pay- 
ing, and if so, time and place of dividend, the address 
of the transfer office or offices, the amount of funded 
or floating debt, etc., all of which must be certified to 
by the officers with the seal of the company attached." 

"Sec. 3. If a bond or loan, the application must 
state the amount authorized, which in every case must 
not be less than $200,000, the amount outstanding, 
when due, percentage of interest, when and where 
payable, whether taxable, whether guaranteed, and by 
whom, name of trustee, if any, etc." 



246 



APPENDIX. 



"Sec. 4. If the Stock List Committee approve the 
application, they shall report to the Governing Com- 
mittee for final action.' ' 

"Sec. 5. A charge of one hundred dollars will be 
made in all cases for listing either stock or bonds, to 
be paid to the secretary of the Exchange before the se- 
curity shall be placed upon the official list of the Ex- 
change. " 

"Sec. 6. All applications for placing securities on 
the unlisted list shall be made in writing by a member 
of the Exchange, and after approval by the Stock List 
Committee, shall be submitted to the Governing Com- 
mittee, and if approved by the latter committee shall 
be placed upon said list without charge." 

"Article XX." 
"begistry of stocks." 

"The Exchange will not call or deal in any active 
speculative stock of any company, a registry of whose 
stock is not kept in some responsible bank or trust 
company, or other satisfactory agency, and which 
shall not give public notice at the time of establishing 
such registry of the number of shares so entrusted to 
be registered, and which shall not give at least thirty 
days' notice through the newspapers, and in writing to 
the President of the Exchange, of any intended in- 
crease of the number of shares, either direct or 
through the issue of convertible bonds, and which shall 
not at the same time, give notice of the object for 
which such issue of stocks or bonds is to be made." 



APPENDIX. 



247 



SYNOPSIS OF THE CORPORATION LAWS 

of the States of 
New Jersey, Delaware, Maine and South Dakota* 

New Jersey. 



Business 
Corporations 



Incorporators: 



Powers: 



Stock: 



May be formed under a general act 
for all lawful purposes except banking 
and kindred purposes, operation of rail- 
ways, telephone and telegraph com- 
panies, etc. 

Three or more persons are required 
to apply, and they may all be non-resi- 
dents. 

Business corporations may purchase, 
hold, sell and otherwise dispose of shares 
of stock and other securities of other 
corporations. They may own, hold, 
mortgage and otherwise deal with real 
property, transact business without the 
state and exercise all of the common law 
powers incident to corporate existence 
generally. 

Two or more kinds of stock may be 
created and voting power may be with- 
held from holders of special stock but 
the preferred stock shall not exceed two- 
thirds of the capital stock paid in, and 



248 



APPENDIX. 



Stockholders' 
Liabilities: 



Stockholders' 
Meetings 



Directors: 



there are restrictions as to dividends 
and the redemption of preferred stock. 
Stock may be paid in installments, except 
$1,000, the minimum with which a cor- 
poration can begin business; upon the 
payment of such installments of the 
capital stock, the law provides that the 
officers must sign and file with the de- 
partment of state, a certificate showing 
the amount of the capital paid in and 
how ; that is, whether it has been paid in 
property or money. 

There is no liability except in the 
amount of the unpaid portion on stock 
held. Payments may be made in cash 
or by the transfer of appropriate prop- 
erty or stock or securities of other sim- 
ilar corporations, and the judgment of 
the directors as to the value of the prop- 
erty conveyed is, in the absence of ac- 
tual fraud, conclusive. 

Must be held within the state and at 
the principal or registered office of the 
corporation. Stockholders may vote by 
proxy. 

There must be at least three directors 
in every business corporation and one 
of them must be an actual resident of 
the state. They may be elected by cumu- 



APPENDIX. 



249 



Directors' 
Meetings 



Books: 



Reports 



Fees for 
Incorporating : 



lative voting if the same is provided in 
the certificate of incorporation. Direct- 
ors must be stockholders at the time of 
their election and they may be classified 
so that their term of office may expire at 
different times if the same is provided 
in the certificate of incorporation. 

May be held outside of the state if 
authority therefor is contained in the 
by-laws or certificate of incorporation. 

If the by-laws or certificate of incor- 
poration so provide the corporate books 
may be kept outside the state except the 
stock and transfer books and these shall 
remain at the principal office of the cor- 
poration in the state, and be open to the 
inspection of stockholders at all reason- 
able times. 

Showing that the corporation is com- 
plying with the laws of the state giving 
the location of the principal office and 
the name of the representative in charge 
as well as the officers thereof and other 
similar information must be filed an- 
nually. 

There must be paid to the Secretary 
of State at the time of incorporating, 
not less than twenty-five dollars, i. e., 
for any corporation whose authorized 



250 



APPENDIX. 



Franchise Tax 



Business 
Corporations 

Incorporators : 



Powers: 



capital does not exceed one hundred and 
twenty-five thousand dollars, and twenty- 
cents per thousand for each additional 
one thousand dollars of capital autho- 
rized. 

One (1/10) tenth of one (1) per centum 
on all capital stock issued and outstand- 
ing up to and including $3,000,000, and 
one (1/20) twentieth of one per centum 
on all amounts in excess of $3,000,000 
and up to $5,000,000 must be paid an- 
nually. 

Delawake. 

May be formed under a general act 
for all lawful purposes. 

Not less than three persons are neces- 
sary to apply for incorporation and 
there are no residental requirements in 
the Act. 

Business corporations may be formed 
to conduct business in any foreign state 
or territory; to purchase, hold and 
guarantee stocks and bonds of other 
corporations. They may have offices 
outside the state and purchase, mort- 
gage, sell or otherwise deal with real 
property. They may issue stock for 
services or property and in the ab- 



APPENDIX. 



251 



Stock: 



Stockholders' 
Liabilities : 



Stockholders* 
Meetings: 



Directors: 



sence of actual fraud the valuation 
placed thereon by the directors is con- 
clusive. The usual common law powers 
may also be enjoyed by all business cor- 
porations. 

Business corporations may create 
through their charter two or more kinds 
of stock and provide for cumulative divi- 
dends or to retire preferred stock out 
of the profits. Voting may be done by 
proxy, and if provided in the certificate 
of incorporation cumulative voting may 
be adopted. There is a provision in the 
law that stock that has been transferred 
on the books of the corporation within 
twenty days preceding the election can- 
not be voted. 

Incorporators may limit the liability 
of stockholders in the certificate of in- 
corporation to the extent of the unpaid 
portion of the capital stock. At least 
$1,000 of the capital stock must be sub- 
scribed for before the corporation be- 
gins business. 

If the by-laws so provide the stock- 
holders' meetings may be held outside 
the state. 

The number of directors must consist 
of three or more natural persons and 



252 



APPENDIX. 



Directors' 
Meetings 

Books: 



Reports: 



Fees for 
Incorporating : 



one of them must be a resident of Dela- 
ware. Every director is required to 
hold at least three shares of stock. They 
have a number of statutory liabilities, 
among them being for failure to file an- 
nual reports. 

May be held outside the state if the 
by-laws so provide. 

There is no provision of the law re- 
quiring corporate books to be kept within 
the state, except the stock ledger or a 
duplicate thereof, which must be kept 
at the principal office within the state, 
in charge of the duly authorized agent 
of the company, and be open to inspec- 
tion by the stockholders at all reason- 
able times. 

Annual reports are required which 
shall state the location of the company's 
office within the state and the name of 
the agent in charge, upon whom service 
of process can be had, also the addresses 
of the officers, etc. ; besides any director 
or stockholder may require the filing of 
a complete statement showing the stock 
issued and how the same has been paid 
for. 
For each $1,000 of the total capital 

stock authorized $ .10 



Franchise 
Tax: 



Business 
Corporations 



APPENDIX. 253 

For each $1,000 of the total capital 
stock authorized above $2,000,- 
000 05 

In no case less than 10.00 

Other fees (estimated) 5.00 

For authorized capital stock of $25,- 
000.00 or less a tax of $5.00 is imposed. 

Where such authorized capital stock 
exceeds $25,000.00 and not over $100,- 
000.00 the tax is $10.00 per annum. 

Where such authorized capital stock 
exceeds $100,000 and not more than 
$300,000.00 the tax is $20.00 per annum. 

Where such authorized capital stock 
exceeds $300,000 but not more than 
$500,000.00 the tax is $25.00 per annum. 

Where such authorized capital stock 
exceeds $500,000 but not more than 
$1,000,000.00 the tax is $50.00. 

Where the authorized capital stock 
exceeds one million dollars the tax is 
$25 for each additional million or frac- 
tion thereof. 

Maine. 

May be formed under a general law 
for any lawful purpose, except to oper- 
ate a bank or trust company, insurance 
business, or to operate (in this state). 



254 



APPENDIX. 



Incorporators: 



Powers: 



Stock: 



Stockholders' 
Liabilities: 



railway, gas, electric and telephone com- 
panies, etc. 

Three or more natural persons are re- 
quired, each of which must be a sub- 
scriber to at least one share of the cap- 
ital stock of such proposed corporation, 
but there are no residential require- 
ments in the law. 

Business corporations may acquire 
and hold stock or other securities in 
other corporations; may conduct busi- 
ness in any state or country and exercise 
all the common law powers enjoyed by 
corporations generally. 

Two or more kinds of stock may be 
created; the mode of voting the same 
(under certain statutory restrictions) as 
well as any other desired condition or 
preference may be incorporated in the 
by-laws or enacted by the stockholders. 

Stockholders are only liable for the 
unpaid portion of stock held by them, 
and such stock may be paid for by the 
transfer of property or services rend- 
ered; and stock so issued may be made 
fully paid for and non assessable in the 
absence of actual fraud in the valuation 
of property conveyed or services per- 
formed. 






APPENDIX. 



255 



Stockholders' 
Meetings : 



Directors: 



Directors' 
Meetings: 

Books: 



Reports: 



To organize as well as all subsequent 
meetings of the stockholders must be 
held within the state. Stockholders may 
vote by proxy, and the manner of so do- 
ing may be determined by the by-laws. 

At least three directors are necessary, 
and they should be stockholders; but 
they may not be residents of the State 
of Maine. Each director must be a 
stockholder. 

If the by-laws so provide, Directors' 
meetings may be held without the state. 

There are no statutory requirements 
in relation to where the corporate books 
shall be kept except as to the corporate 
minute book and record and stock regis- 
ter. These are to be kept within the 
state and to be open for the inspection 
of stockholders at all reasonable times 
and remain in the possession of the 
clerk of the corporation. 

Annual reports are required giving 
the names of the officers and directors 
of the corporation as well as the clerk 
and location of the office within the 
state, also the amount of the capital 
stock. 



256 



APPENDIX. 



Fees for 
Incorporating : 



Franchise 
Tax: 



About twenty-five dollars for state 
fees and for recording certificates, etc., 
for all corporations with capitalization 
of ten thousand dollars or less ; and fifty 
dollars when the same exceeds ten thou- 
sand dollars, and up to and including 
five hundred thousand dollars; and ten 
dollars for each hundred thousand dol- 
lars in excess of five hundred thousand 
dollars; besides there are several other 
fees provided by statute for recording, 
etc., amounting to some twenty dollars. 

There is an annual franchise tax, as 

follows (Laws of 1907). 

" Every corporation incorporated un- 
der the laws of the state, except such as 
are excepted by section Twenty- six of 
chapter forty-seven, shall pay an annual 
franchise tax of five dollars, provided 
the authorized capital of said corpora- 
tion does not exceed fifty thousand dol- 
lars, of ten dollars, provided said au- 
thorized capital exceeds fifty thousand 
dollars, and does not exceed two hundred 
thousand dollars; of fifty dollars, pro- 
vided said authorized capital exceeds 
two hundred thousand, and does not ex- 
ceed five hundred thousand dollars; of 
seventy-five dollars, provided said au- 
thorized capital exceeds five hundred 
thousand dollars, and does not exceed 
one million dollars ; and the further sum 
of fifty dollars a year for each one mil- 



I 



APPENDIX. 



257 



lion dollars, or any part thereof, in ex- 
cess of one million dollars." 



Business 
Corporations 

Incorporators : 



Powers: 



Stock: 



Stockholders' 
Liabilities : 



South Dakota. 

May be formed for any lawful pur- 
pose. 

Three or more persons are required 
to obtain incorporation and one-third of 
such incorporators must be residents of 
this state. Each incorporator must be 
a subscriber of stock to the extent of one 
share. 

To transact its business in any state 
or foreign country, (by providing for the 
same in the certificate of incorporation) 
and possess all common law powers in- 
cident to corporate bodies generally that 
are necessary to the exercise of the pow- 
ers specially conferred. 

Two or more kinds of stock may be 
created and the same may be issued in 
exchange for property or services. 
Cumulative voting in the election of di- 
rectors is provided for in the Constitu- 
tion of the State. 

There is no liability on capital stock 
beyond the unpaid portion of the par 
value thereof, except for labor claims, 
and stock may be paid for in money, 



258 



APPENDIX. 



Stockholders' 
Meetings 



Directors: 



Directors' 
Meetings 



Books: 



services or property; the valuation 
placed thereon by the Board of Direct- 
ors in good faith (and recorded in the 
minutes of the corporation) is conclu- 
sive. 

May be held outside the state if the 
articles of incorporation so provide. In 
all elections of directors the cumulative 
method of voting may be adopted. 

At least three and not more than 
eleven directors may be created, one of 
which shall be a resident of the state. 
Each director must be a stockholder in 
the corporation. Directors have a stat- 
utory liability in declaring illegal divi- 
dends and other unlawful acts enumer- 
ated in the Statute. 

May be held outside the state at the 
office named in the articles of incorpora- 
tion. The president of the company 
must also be a director. 

The law requires that a book of by- 
laws as well as the minutes of all stock- 
holders' and directors' meetings and 
stock and transfer books, shall be kept; 
and they must be open to the inspection 
of creditors as well as stockholders and 
directors of the corporation. But the 



APPENDIX. 259 

law does not require that any of these 
books (except the book of By-laws) shall 
be kept within the state. 
Reports: Annual reports showing the amount 

of capital stock paid in, as well as the 
indebtedness of the corporation and 
other matters ordinarily private to cor- 
porations, must be published, and such 
reports must be verified. Stockholders 
representing 20% of the capital stock 
may also require a written statement of 
the condition of the corporation to be 
furnished at any time. 

Fees for Authorized capital stock of $ 25,000 or less $ 10.00 

Incorporating: Over $25,000 and not exceeding 100,000 15.00 

Over $100,000 and not exceeding 500,000 20.00 

Over $500,000 and not exceeding 1,000,000 30.00 

Over $1,000,000 and not exceeding .... 1,500,000 40.00 

Over $1,500,000 and not exceeding .... 2,000,000 50.00 

Over $2,000,000 and not exceeding .... 2.500,000 60.00 

Over $2,500,000 and not exceeding .... 3,000,000 70.00 

Over $3,000,000 and not exceeding .... 3,500,000 80.00 

Over $3,500,000 and not exceeding .... 4,000,000 90.00 

Over $4,000,000 and not exceeding .... 4,500,000 100.00 

Over $4,500,000 and not exceeding .... 5,000,000 110.00 

Over $5,000,000 150.00 

For appointment of resident Agent.... 5.00 
For certified copies 25c per folio of 100 words and $1.00 for 
certificate. 

Franchise 

rp„ . There are no annual franchise or other fees. 

Note : As the corporation laws of the various states are constantly- 
undergoing changes, it will be necessary to refer to the laws in force at the 
time of inquiry, in order that accurate information may be obtained. 



260 APPENDIX. 

FOEEIGN CoKPOKATIONS. 

"An Act entitled 'An act to regulate the admission 
of foreign corporations for profit, to do business in the 
State of Illinois. ' (Approved May 18, 1905; in force 
July 1, 1905. )" 

i ' Section 1. Be it enacted by the People of the State 
of Illinois represented in the General Assembly : That 
before any foreign corporation for profit shall be per- 
mitted or allowed to transact any business or exercise 
any of its corporate powers in the State of Illinois, 
other than insurance companies, building and loan com- 
panies and surety companies, they shall be required to 
comply with the provisions of this act and shall be 
subject to all of the regulations prescribed herein, as 
well as all other regulations, limitations and restric- 
tions applying to corporations of like character organ- 
ized under the laws of this state.' ' 

"Sec. 2. When any corporation organized under the 
laws of any foreign state or country, for the transac- 
tion of business for profit, desires admission into the 
State of Illinois, for the purpose of transacting busi- 
ness or exercising its corporate powers or franchise 
it shall make application to the Secretary of State, 
signed and sworn to by the president and secretary, 
stating what business such corporation proposes to 
pursue under its charter, the amount of capital stock 
of such corporation, whether it is transacting or it is 
intended that it shall transact business in any other 
state or country, the proportion of its business in- 
tended to be carried on in the State of Illinois, the 
amount paid in upon its capital stock, what property 
and assets and an estimate of the value thereof, will 
be employed in the business of said corporation in the 
State of Illinois; if any of its capital subscribed has 
not been paid in what disposition is to be made thereof, 



APPENDIX. 261 

the names of the president, secretary and directors 
of said corporation and their residences, where its prin- 
cipal office in Illinois will be located and the name and 
address of some attorney in fact, upon whom service 
can be had in all suits commenced in this state and, if 
required by the Secretary of State, the names and 
residences of all stockholders in said corporation as 
shown by its records, and such corporation shall file 
with the Secretary of State, copy of its charter or 
articles of incorporation, or in case such corporation 
is incorporated merely by a certificate then a copy of 
its certificate of incorporation duly certified and 
authenticated by the officer who issued the original, 
or by the recorder or registrar of the office in which 
said original charter, articles or certificates may have 
been recorded. ' ' 

"The Secretary of State shall have power to pre- 
scribe the form of such application and may, in 
addition thereto, propound such interrogatory or inter- 
rogatories to the applicants respecting the character 
of the business in which said corporation proposes to 
engage, the amount of its capital stock, the proportion 
of its business that it is intended shall be carried on 
in this state, and the proportion and location of its 
business in other states or countries, and such inter- 
rogatories shall be answered under oath and the inter- 
rogatories and answers thereto shall be filed with said 
application and with the certified copy of its charter 
and shall be and operate as a limitation upon the 
powers of said corporation to transact business in the 
State of Illinois." 

"The Secretary of State, upon the admission of such 
foreign corporation to do business in the State of 
Illinois, shall issue a certified copy of all papers, in- 
cluding certified copy of the charter of said corpora- 



262 APPENDIX. 

tion, and shall state, in a certificate of authority to do 
business issued by him, the powers and object of said 
corporation which may be exercised in this state, not 
in conflict with the law or public policy of this state, 
and no corporation shall, by the certificate of the Sec- 
retary of State, be authorized to transact any business 
in this state for the transaction of which a corporation 
cannot be organized under the laws of this state, and 
no foreign corporation shall exercise any powers in 
this state not authorized by the provisions of its 
charter. " 

"Sec. 3. Every foreign corporation admitted to do 
business in the State of Illinois under the provisions 
of this act shall constantly keep on file in the office of 
the Secretary of State an affidavit of the president 
and secretary, showing the location of its principal 
business office in the State of Illinois, and the name 
and address of some person who may be found in this 
State, for the purpose of accepting service upon said 
corporation, in all suits that may be commenced against 
it, and as often as said corporation shall change the 
location of its office, or its attorney for receiving and 
accepting service, a new affidavit shall be filed to take 
the place of all such affidavits previously filed by the 
officers of said corporation. Such corporation when 
admitted to do business in the State of Illinois, under 
this act shall be required to make such reports from 
time to time as are required to be made by similar cor- 
porations organized under the laws of this state and 
all regulations now in force or hereafter imposed upon 
domestic corporations, shall be alike observed and 
complied with by all foreign corporations doing busi- 
ness in this state." 

"No foreign corporation admitted to do business in 
this state under the provisions of this act shall hold 
any real estate except such as may be necessary for 



APPENDIX. 263 

the proper carrying on of its legitimate business, nor 
be permitted to mortgage, pledge or encumber its real 
or personal property situated in this state to the injury 
or exclusion of any citizen or corporation of this state 
who is creditor of such foreign corporation and no 
mortgage by any foreign corporation, except railroad 
and telegraph companies, given to secure any debt 
created in any other state shall take effect as against 
any citizen or corporation of this state until all of its 
liabilities due any person or corporation of this state 
at the time of recording such mortgage, shall have been 
fully paid and extinguished. Before any foreign cor- 
poration shall be authorized to do business in this 
state it shall be required to pay into the office of the 
Secretary of State upon the proportion of its stock 
represented by its property and business in Illinois, 
fees equal to those required of similar corporations 
formed within and under the laws of this state.' 9 

* * * "Sec. 5. At any time the Secretary of 
State may, in his discretion, prepare and propound to 
the president, secretary, any director or manager of 
any corporation doing business in this state under the 
provisions of this act, such interrogatories respecting 
the character of business being transacted by it, the lo- 
cation of its business, the names and residences of its 
directors and officers, and the amount of capital paid 
in, as well as what disposition has been made of capital 
stock subscribed for or authorized and not paid in, 
and such interrogatories shall be answered under oath 
by the officer or director to whom propounded, within 
five days after receipt thereof, and upon the failure or 
refusal of such officer or director to fully answer such 
interrogatories and file the same, with his answers, in 
the office of the Secretary of State, within ten days 
after receiving the same, the Secretary of State may 
revoke the authority of such corporation to do business 



264 APPENDIX. 

in this state, by filing with the certified copy of the 
charter of snch corporation a certificate of revocation, 
and by the publication thereof for one issue in some 
newspaper of general circulation in the State of 
Illinois, and thereafter such corporation shall not exer- 
cise any of its corporate powers or franchises in the 
State of Illinois. When such interrogatories shall 
have been answered and filed with the answers thereto, 
in the office of the Secretary of State, if thereby any 
violation of the law, or of the charter of said corpora- 
tion, or any excess of its powers and authority to do 
business in this state is disclosed, a copy thereof, with 
such information, shall be immediately transmitted to 
the Attorney General of this state for his action." 

"Sec. 6. Every foreign corporation amenable to 
the provisions of this act, which shall neglect or fail 
to comply with any of the provisions of the same as 
herein provided, shall be subject to a penalty of not 
less than one thousand dollars ($1,000) nor exceeding 
ten thousand dollars ($10,000), to be recovered before 
any court of competent jurisdiction, and it is hereby 
made the duty of the Secretary of State, as he may be 
advised, or may ascertain that any corporation is 
doing business in contravention of this act, to report 
such fact to the Attorney General of this state, and it 
shall be his duty and the duty of the state's attorney 
of the proper county to bring such actions at law as 
shall be necessary for the recovery of the penalties im- 
posed hereby, and in addition to such penalty , if after 
this act shall take effect any foreign corporation shall 
fail to comply herewith, no suit may be maintained 
either at law or in equity upon any claim, legal or 
equitable, whether arising out of contract or tort in 

any court in this state." 

* * * * * * 



APPENDIX. 



265 



Eaknings on Stocks and Bonds. 

This table gives the approximate earnings on Stocks and Bonds. 
As an illustration, a 5% stock selling at 90, yields 5.56%. By look- 
ing down the 5% column to 90 this will be shown, etc. 



Selling 
Price 


1% 


2% 


3% 


4% 


5% 


6% 


10 


10% 


20% 


30% 


40% 


50% 


60% 


12% 


8. 


16. 


24. 


32. 


40. 


48. 


15 


6.67 


13.33 


20. 


26.67 


33.33 


40. 


17% 


5.71 


11.43 


17.14 


22.86 


28.57 


34.28 


20 


'5. 


10. 


15. 


20. 


25. 


30. 


22% 


4.44 


8.89 


13.33 


17.78 


22.22 


26.67 


25 


4. 


8. 


12. 


16. 


20. 


24. 


27% 


3.64 


7.27 


10.91 


14.55 


18.18 


21.82 


30 


3.33 


6 67 


10. 


13.33 


16.67 


20. 


32% 


3.08 


6.15 


9.23 


12.31 


15.39 


18.46 


35 


2.86 


5.71 


8.57 


11.43 


14.29 


17.14 


37% 


2.67 


5 33 


8. 


10.67 


13.33 


16. 


40 


2.5 


5 


7.5 


10. 


12.5 


15. 


42% 


2.35 


4.70 


7.06 


9.41 


11.76 


14.12 


45 


2.22 


4.44 


6.67 


8.89 


11.11 


13.33 


47% 


2.11 


4.21 


6.32 


8.42 


10.53 


12.63 


50 


2. 


4 


6. 


8. 


10. 


12. 


52% 


1.90 


3.81 


5.71 


7.62 


9.52 


11.43 


55 


1.82 


3.63 


5.45 


7.27 


9.09 


10.91 


57% 


1.74 


3.48 


5.22 


6.96 


8.70 


10.43 


60 


1.67 


3.33 


5. 


6.67 


8.33 


10. 


62% 


1.6 


3.2 


4.8 


6.4 


8. 


9.6 


65 


1.54 


3.08 


4.62 


6.15 


7.69 


9.23 


67% 


1.48 


2.96 


4.44 


5.93 


7.41 


8.89 


70 


1.43 


2.S6 


4.29 


5.71 


7.14 


8.57 


72% 


1.38 


2.76 


4.14 


5.52 


6.90 


8.27 


75 


1.33 


2.67 


4. 


5.33 


6.67 


8. 


77% 


1.29 


2.58 


3.87 


5.16 


6.45 


7.74 


80 


1.25 


2.5 


3.75 


5. 


6.25 


7.5 


82% 


1.21 


2.42 


3.64 


4.85 


6.06 


7.27 


85 


1.18 


2.35 


3.53 


4.71 


5.88 


7.06 


87% 


1.14 


2.29 


3.43 


4.57 


5.71 


6.S6 


90 


1.11 


2.22 


3.33 


4.44 


5.56 


6.67 


92% 


1.08 


2.16 


3.24 


4.32 


5.41 


6.49 


95 


1.05 


2.11 


3.16 


4.21 


5.26 


6.32 


97% 


1.03 


2.05 


3.08 


4.10 


5.13 


6.15 


100 


1. 


2. 


3. 


4. 


5. 


6. 


105 


.95 


1.90 


2.86 


3.81 


4.76 


5.71 


110 


.91 


1.82 


2.73 


3.64 


4.55 


5.45 


115 


.87 


1.74 


2.61 


3.48 


4.35 


5.22 


120 


.83 


1.67 


2.5 


3.33 


4.17 


5. 


125 


.8 


1.6 


2.4 


3.2 


4. 


4.8 


130 


.77 


1.54 


2.31 


3.08 


3.85 


4.62 


135 


.74 


1.48 


2.22 


2.96 


3.70 


4.44 


140 


.71 


1.43 


2.14 


2.86 


3.57 


4.29 


145 


.69 


1.38 


2.07 


2.76 


3.45 


4.14 


150 


.67 


1.33 


2. 


2.67 


3.33 


4. 


155 


.65 


1.29 


1.94 


2.58 


3.23 


3.87 


160 


.63 


1.25 


1.87 


2.5 


3.12 


3.75 


165 


.61 


1.21 


1.82 


2.42 


3.03 


3.64 


170 


.59 


1.18 


1.76 


2.35 


2.94 


3.53 


175 


.57 


1.14 


1.71 


2.29 


2.86 


3.43 


180 


.56 


1.11 


1.67 


2.22 


2.78 


3.33 


185 


.54 


1.08 


1.62 


2.16 


2.70 


3.24 


190 


.53 


1.05 


1.58 


2.11 


2.63 


3.16 


195 


.51 


1.03 


1.54 


2.05 


2.56 


3.08 


200 


.5 


1. 


1.5 


2. 


2.5 


3. 



7% 



70% 
56. 
46.67 
40. 
35. 
31.11 
28. 
25.45 
23.33 
21.54 
20. 
18.67 
17.5 
16.47 
15.56 
14.74 
14. 
13.33 
12.72 
12.17 
11.67 
11.2 
10.77 
10.37 
10. 
9.65 
9.33 
9.03 
8.75 
8.48 
8.24 
8. 

7.78 
7.57 
7.37 
7.18 

6.67 

6.36 

6.09 

5.83 

5.6 

5.38 

5.19 

5. 

4.83 

4.67 

4.52 

4.37 

4.24 

4.12 

4. 

3.89 

3.78 

3.68 

3.59 

3.5 



8% 


9% 


10% 


80% 


90% 


100% 


64. 


72. 


80. 


53.33 


60. 


66.67 


45.71 


51.43 


57.14 


40. 


45. 


50. 


35.56 


40. 


44.44 


32. 


36. 


40. 


29.09 


32.73 


36.36 


26.67 


30. 


33.33 


24.62 


27.69 


30.77 


22.86 


25.71 


28.57 


21.33 


24. 


26.67 


20. 


22.5 


25. 


18.82 


21.18 


23.53 


17.78 


20. 


22.22 


16.84 


18.95 


21.05 


16. 


IS. 


20. 


15.24 


17.14 


19.05 


14.55 


16.36 


18.18 


13.91 


15.65 


17.39 


13.33 


15. 


16.67 


12.8 


14.4 


16. 


12.31 


13. S5 


15.38 


11.85 


13.33 


14. SI 


11.43 


12.86 


14.29 


11.03 


12.41 


13.79 


10.67 


12. 


13.33 


10.32 


11.61 


12.90 


10. 


11.25 


12.5 


9.70 


10.91 


12.12 


9.41 


10.59 


11.76 


9.14 


10.29 


11.43 


8.89 


10. 


11.11 


8.65 


9.73 


10.81 


8.42 


9.47 


10.53 


8.21 


9.23 


10.26 


8. 


9. 


10. 


7.62 


8.57 


9.52 


7.27 


8.18 


9.09 


6.96 


7.83 


8.70 


6.67 


7.5 


8.33 


6.4 


7.2 


8. 


6.15 


6.92 


7.69 


5.93 


6.67 


7.41 


5.71 


6.43 


7.14 


5.52 


6.21 


6.90 


5.33 


6. 


6.67 


5.16 


5.81 


6.45 


5. 


5.62 


6.25 


4.85 


5.45 


6.06 


4.71 


5.29 


5.88 


4.57 


5.14 


5.71 


4.44 


5. 


5.56 


4.32 


4.86 


5.41 


4.21 


4.74 


5.26 


4.10 


4.62 


5.13 


4. 


4.5 


5. 



12% 



120% 
96. 
SO. 
68.57 
60. 
53.33 
48. 
42.64 
40. 
36 . 92 
34.29 
32. 
30. 
28.23 
26.67 
25.26 
24. 
22.86 
21.82 
20.87 
20. 
19.02 
18.46 
17.78 
17.14 
16.55 
16. 
15.48 
15. 
14.54 
14.12 
13.71 
13.33 
12.97 
12.63 
12.31 
12. 
11.43 
10.91 
10.43 
10. 
9.6 
9.23 
8.89 
8.57 
8.28 
8. 

7.74 
7.5 
7.27 
7.06 
6.S5 
6.67 
6.49 
6.32 
6.15 
6. 



INDEX 



Feank's "Science of Organization" etc. 



INDEX 

A 

PAGE 

ACCOIfNTS, 

Books of . 98 

Examination of 103 

How to Audk 103 

ADVANTAGES OP INCORPORATING 21 

AGREEMENTS, 

Between Majority Stockholders 92 

Legality of 92 

ALTERATION OF RECORDS, ETC 100 

AMOUNT OF CAPITALIZATION 27, 51 

APPRAISAL OF PROPERTY 34 

Illustration 202 

APPROVAL OF MINUTES OF MEETINGS 100 

ASSIGNMENT, 

Of Commissioners' Receipt or Subscription 213 

Of Installment Certificate 214 

Of Patent 166, 229-231 

Of Stock 92 

AUDIT OF ACCOUNTS AND RECORDS 103 

How to Accomplish 103 

B 

BONDS (See Capital, Bonds and Stocks) 43 

Convertible Into Stock 50 

Capital Obtained by Issue of 176-193 

Sale of 177 

Underwriting 150 

(269) 



270 INDEX. 

PAGE 

BONUS, 

Stock as 63 

BOOKS, 

Corporate Books 98, 103 

Inspection of 86 

Minute Book 98 

BUSINESS-BUILDING 19 

BUSINESS CORPORATIONS, 

Distinguished From Mining * 171 

BY-LAWS AND THEIR USES 94-195 

Adoption 96 

Illustration 217 

C 

CAPITAL, BONDS AND STOCKS, 

Defined and Distinguished 43 

CAPITALIZATION OP CORPORATIONS 51 

Mode of 51 

Mining Corporations 174 

Good Will as Basis 158 

CAPITAL, RAISING ADDITIONAL 35-60-69-193 

CAPITAL STOCK 43 

CERTIFICATE OF INCORPORATION, 

Filing 32 

CERTIFICATE OF STOCK, 

Assignment of 48 

Common Stock 46 

Negotiability of 48 

Preferred Stock 46 

CHARTER (See Certificate of Incorporation.) 

CHECKS, 

Protection in Issuing 222 



INDEX. 271 

PAGE 

CLASSIFICATION, 

Of Directors 31 

Of Stock 43-193 

COMMISSIONERS, 

Receipt, Form of 211 

COMMON ERROR, A 19 

COMMON STOCK (See Capital, Bonds and Stocks) 43 

CONSOLIDATION OF CORPORATIONS, 

Discussion on. . . , 124 

CONSOLIDATION OF ENTERPRISES 124 

How Accomplished 127 

CORPORATION, AND ITS ADVANTAGES 21 

CORPORATE FINANCING 43 

CORPORATE MANAGEMENT 79 

CORPORATE RECORDS AND BOOKS OF ACCOUNT 98 

CORPORATION, 

Defined 21 

How Organized 24 

Where to Organize 36 

Advantages of 21 

Books 98 

Formation of 24 

Mining Corporations 171 

COUNSEL, Necessity of 35, 176, 183, 190 

CONTRACTS, 

For Underwriting Stocks and Bonds 150 

To Form a Corporation 190, 191, 197, 201 

CUMULATIVE DIVIDENDS, 

Defined 46 

CUMULATIVE VOTING, 

Explained 93 



272 INDEX. 

D 

PAGE 

DEBTS, 

Directors' Liability for 80 

Officers' Liability for 83 

Stockholders' Liability for 86 

DEEDS, 

Preparation of 183 

Placed in Escrow 182 

DELAWARE, 

Synopsis of Corporation Laws 250 

DEPRECIATION, 

See Accounting, etc 109 

DIRECTORS AND OFFICERS— THEIR DUTIES AND LIA- 
BILITIES 79 

DISSOLUTION OF CORPORATION 128 

DIVIDENDS (See Capital, Bonds and Stocks) 43 

Liability for Unlawful Payment 80, 86, 91, 117 

Table of 265 

DURATION, 

Of Corporate Existence 27 

E 
EARNINGS, 

Capitalization Regulated by 53, 159 

Table of 263 

ELECTIONS, 

Directors and Officers 31 

ERROR, A COMMON 19 

EXAMINATION OF BOOKS AND RECORDS 112 

How Accomplished 103 

EXCHANGE OF PROPERTY FOR STOCK, 

Plan Illustrated 191, 194, 206, 209 



INDEX. 273 

p 

PAGE 

FEES FOR INCORPORATING, 

Delaware 250 

Maine 253 

New Jersey 247 

South Dakota 257 

FINANCING ENTERPRISES 43, 60, 137, 191, 194 

FOREIGN CORPORATIONS, 

Law Regulating 37 

e. g. Illinois 260 

FORMATION OF A CORPORATION, 

How to Accomplish 24 

FORMS (See Explanation of) 189 

Appraisal of Property >. . 208 

Assignment of Invention 227 

Assignment of Patent 231 

Assignment of Undivided Interest in Patent 229 

Assignment of Installment Certificate 216 

By-Laws 217 

Commissioners' Receipt 211 

Contracts, Genl. and Special 197, 201 

Commissioners' Receipt, Assignment of 213 

Escrow Agreement 183 

Installment Certificate 214 

Option Contract (Cash Plan) 233 

Option Contract (Stock Plan) 238 

Proxy to vote 243 

Purpose for Coal Company 178 

Reorganization Certificate 206 

Resolution, Ratifying, etc 209 

FULLY PAID STOCK (See Capital, Bonds and Stocks) 43 



274 INDEX. 

G 

PAGE 

GOOD WILL, 

Good Will — Trademarks and Trade Names 154 

How Preserved 22, 72, 154 

How Valued 159 

GUARANTEED STOCK, 

Discussed 43, 152 

H 

HOW TO ORGANIZE A CORPORATION 24, 171, 195 

e. g. Illinois 24 

I 

ILLUSTRATIONS (See Explanation of) 189 

Appraisal of Property 208 

Assignment of Invention 227 

Assignment of Patent 231 

Assignment of Undivided Interest in Patent 229 

Assignment of Installment Certificate 216 

By-Laws 217 

Contracts, Genl. and Special 197, 201 

Commissioners' Receipt 211 

Assignment of Commissioners' Receipt 213 

Escrow Agreement 183 

Installment Certificate 214 

Option Contract (Cash Plan) 233 

Option Contract (Stock Plan) 238 

Proxy to vote 243 

Purpose for Coal Company 178 

Reorganization, how Accomplished 191, 192, 206 

Reorganization, Mistakes in 122 

Resolution, Ratifying, etc 209 



INDEX. 275 

PAGE 

INCREASE OP CAPITAL STOCK, 

When Advisable 60 

INSPECTION OF CORPORATE BOOKS, 

Stockholders, Right to 112 

INSTALLMENT, 

Assignment of Rights 216 

Certificate 214 

Selling Stock on 58 

ISSUANCE OP STOCK FOR PROPERTY 69, 129, 158 

Inventory 73, 194 

L. 

LEADING INCORPORATING STATES 36 

LEASE (See Conveyance) 180 

LEGAL ENTITY— CORPORATION IS 21, 24 

LIABILITY, 

Of Directors and Officers 79 

Of Stockholders 86 

LIQUIDATION (See Dissolution) 127 

LISTING OF STOCKS AND BONDS 60 

e. g. Chicago Stock Exchange Rules 245 

LOCATION 64, 121, 179 

M 
MAINE, 

Synopsis of Corporation Laws 253 

MAJORITY STOCKHOLDERS 90 

Rights of 91 

MEETINGS, 

Records of '. 29, 99 

To Organize Corporation 28 

MINING ENTERPRISES 171 

Distinguished 171 



276 INDEX. 

PAGE 

MINORITY STOCKHOLDERS, 

Rights of . . .91, 92 

MINUTES, 

Amendment of 101 

Approval of 100 

Book of 98 

MORTGAGE, 

Security for Bonds 49, 176 

N 

NAME 26 

Preservation of 24, 192 

Trade Name 154 

NEW JERSEY, 

Synopsis of Corporation Laws 247 

NOTICE, 

Of First Meeting, in Illinois 28 

Waiver of 28, 29 

What Constitutes, to Corporation 80 

NUMBER OF DIRECTORS 31 

O 

OFFICE IN OTHER STATES (See Foreign Corporation). 

OFFICERS, 

Liabilities for Salaries Paid, When, etc 84 

Necessary 33 

Powers of 79 

OPTIONS, 

Forms of 233, 238 

Purpose of 181 

OVER-ISSUED STOCK, 

Defined 45 



INDEX. 



277 



PAGE 

OVER-VALUATION OP PROPERTY, 

Liability Therefrom 70, 87, 144, 173 

P 

PAR VALUE, 

Stock Should Be Issued At 89 

PARTNERSHIP (See Advantages of Incorporating) 21 

PATENTS (See Patents and Their Commercial Value) 160 

ASSIGNMENT, 

Of Invention Before Patent 227 

Of Undivided Interest 229 

Of Whole, After Patent Issues 231 

DEPRECIATING "BOOK VALUE" OF ASSETS 103 

PATENTABILITY, 

What Constitutes 164 

U. S. Statute Defining Requisites 162 

PAYMENT FOR STOCK IN PROPERTY (See Over-Valuation 
of Property). 

POWERS, 

How Derived 27, 177 

PREFERRED STOCK, 

Dividends on 47 

Right to Issue 47 

Terms and Conditions of 46 

PROMOTERS, 

Contracts (See Promotion Contracts) 143 

Defined and Discussed 137 

PROMOTION CONTRACTS, 

Observations on 143 

PROMOTION OF ENTERPRISES 137 

PROXY— Right to Appoint 93 

Form of 243 

PURPOSES 27, 177 






278 INDEX. 

R 

PAGE 

RAISING OF ADDITIONAL CAPITAL 35, 60, 191, 194 

RATIFICATION, 

Of Acts of Officers, etc 97 

RECEIPTS, 

Of Commissioners and Trustees 211 

RECORDING, 

By-Laws 97 

Certificates of Incorporation 32 

Minutes 99 

REORGANIZATION— Possible Advantages Therefrom 115 

REORGANIZATION CERTIFICATE, 

Illustration and Explanation 192, 206 

REPORTS, 

Annual 128 

Resolution Ratifying Commissioners, etc 195, 209 

RESOLUTION, 

In Accepting Property, etc 209 

Ratifying Acts of Commissioners, etc 209 

RIGHTS OF STOCKHOLDERS, 

Discussion on 86 

S 

SALARIES, 

Of Directors and Officers 83 

SALE, 

Of Business 23, 72, 117, 191, 194 

Of Bonds 60, 150, 194 

Of Stock 60, 150, 194 

SECRETARY, 

(Custodian of Books and Records) 

Necessity of 82 

SHARES (See Capital, Bonds and Stocks). 



INDEX. 



279 



PAGE 

SOUTH DAKOTA, 

Synopsis of Corporation Laws 257 

STOCK, 

Classification and Definition of (See Capital, Bonds and 
Stocks). 

Listing 60, 194 

Underwriting 150 

STOCKHOLDERS' RIGHTS AND LIABILITIES, 

Discussion on 86 

STOCK-JOBBING 129 

SUBSCRIBER, 

To Capital Stock — Liability of 87 

Subscription 28, 150, 190, 201 

T 
TABLE, 

Of Earnings of Stocks and Bonds 265 

TRADEMARKS 155 

TRADE NAME, 

Value of 71, 159 

TRANSFERRING AN ESTABLISHED BUSINESS TO A COR- 
PORATION 69-76 

TREASURER, 

Necessity of 82 

U 

UNDERWRITING, 

Contracts Relating to 151 

Stocks and Bonds 150 



280 INDEX. 

PAGE 

VALUATION OF PROPERTY, 

Abuse of 71, 87 

A Safe Rule in 71 

Good Will 159 

Mining Property Distinguished 174 

VOTING, 

Cumulative 93 

Proxies . , 93 

W 
WATERED STOCK, 

Defined 45 

WHERE TO ORGANIZE, 

Subject Discussed 36 



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